Monday, November 15, 2010

Morning Note...


Futures ~45bps higher this morning on some early “push-pull” action.  U.S markets were pushed higher by strong European action (despite continued bailout concerns for Ireland and a deficit revision higher in Greece) throughout their session thus far (+80bps) and then spiked further on “Merger Monday” news of a $92/share (32% premium) bid for Bucyrus (BUCY) from Caterpillar (CAT) and a $33.85 bid for ISLN from EMC.  Massey Energy (MEE) is also rumored at a takeout candidate, perhaps by steel giant ArcelorMittal (MT).  Additionally, good news in the form of October Advance Retail Sales (+1.2% vs. +0.7%/e) also pushed futures higher.  However, futures were pulled down off those highs after a much worse than expected Empire Manufacturing survey (-11.14 vs. +14/e) release.  Also, BHP on Sunday officially pulled its $40 billion bid for Canada’s Potash (POT) due to government opposition to the deal.  Net net, this morning’s positive news is slightly outweighing the bad.  Asia mixed overnight (no official China tightening, as yet).  USD +30bps.  Gold +20bps.  Oil +70bps. 

Plenty of interesting reading over the weekend, and the general themes were “anti-QE2” and caution on the municipal bond markets.  Here’s a cut-and-paste, with links, from JPM research:

·         Fed official says QE2 is feeding bubbles in risk assets; Fed’s Fisher says a bubble already appears to be forming in private equity, w/the terms on some deals returning to the levels of ’06-’07 (Fisher singles out the recent Carlyle/SVR transaction); Fisher said he was worried by what he saw as signs of “speculative activity” in stocks, bonds, and commodities.  CNBC/Reuters   http://bit.ly/9QVXNC   

·         Greenspan on Meet The Press warned about a potential crisis in the Treasury markets unless action is taken to cut the US budget deficit – Reuters  

·         Muni bond market “shudders”, leaving investors to wonder if there will be more bad news for the sector – worries about the credit worthiness of the country’s state and local governments, combined w/a huge pipeline of bond sales, has hurt prices.  NYT  http://nyti.ms/dd77O9    

·         WSJ muni article – prices sold off last week, sending a “shiver” through the market.  Investors cited a big backlog of deals (thanks to worries re the fate of Build America Bonds), credit concerns, and the effects of QE2.  The new GOP majority could mean less federal aid for states.  WSJ    http://on.wsj.com/cpHn2K    

·         Muni bond sales projected to surge this week - municipal bond sales are expected to total $24.4 billion in 279 sales this week, more than 2.5 times the estimated $9.6 billion last week – Reuters 

·         Scientists now think sea levels could rise ~3 feet this century while other are fearful of a rise of as much as 6 feet; the former number would pose serious risks to coastal regions around the world, w/flooding becoming much more frequent, while the later would jeopardize some of the world’s great cities – NYT   http://nyti.ms/92nwVJ   

·         The G20 meeting wrapped up Fri morning and the US performance continues to be panned in the press; not only did the White House fail to sign a trade pact w/South Korea on the sidelines of the event, but the US failed to have any of its signature aims get codified in the final communiqué.  Officials from around the world were highly critical of the Fed’s QE2 (which Obama, in a move rare for a US president, defended).  The review articles haven’t been kind, inc. “Embarrassment in Seoul” (WSJ; http://on.wsj.com/auLqtf)  

·         Ireland – The BBC has learned that Ireland, which is facing mounting concern about its economy, is in preliminary talks with EU officials about possible financial support.  The Irish government has denied such talks are taking place, but the BBC's Business Correspondent, Joe Lynam, says it only a matter of time before a formal request is made.  BBC   http://bbc.in/bsJ7Tv   

·         China – the country may consider a series of measures aimed at preventing “hot money” from hitting its shores.  Ma Delun, a deputy governor of central bank the People's Bank of China (PBOC) said such a policy kit would include reserve requirement adjustment, management of foreign exchange positions, and open market operations – Reuters   http://reut.rs/b08fvG    

·         How to make the dollar sound again – James Grant - why the US should consider returning to the gold standard – NYT  http://nyti.ms/8XeGUw   

·         Obama - One and done: To be a great president, Obama should not seek reelection in 2012 – Washington Post.   http://wapo.st/dmEpEO   

·         Is the US Presidency too big a job?  Newsweek.  Among a handful of presidential historians NEWSWEEK contacted for this story, there was a general consensus that the modern presidency may have become too bloated. “The growth is exponential in these last 50 years, especially the number of things that are expected of the president,”  http://bit.ly/cwLroQ   

·         House investigations - Here are 9 investigations Darrell Issa’s House Oversight Committee is likely to take up — and 10 more that we really need – NYT  http://nyti.ms/bXXnfl   

AKAM downgrade at OPCO.  JOYG higher on BUCY takeout.  ASTM files for $75M offering.  LLNW cut at OPCO.  BofAMLCO ups COR, GBL.  CITI ups CL, PVH.  GSCO ups KWK.  BARD ups UNP.  WEFA ups IDA.  MCCC to be acquired for $8.75/share by Rocco Commisso.  CSUN beats by 18c.  DYN upgrade at JPM.  DBAB ups RJET.  F reports Super Duty truck has 50% market share.  HBE reports higher takeout price from KTOS.  RINO misses by 11c.  PUDA misses.  MEI wins General Motors contract.  THOR downgrade and tgt cut at Leerik Swann.  TSTC beats earnings estimates.  CITI cuts ERF.  COWN cuts STRI.  DBAB cuts MON.  MSCO cuts RAX.  Nomura cuts JASO.  STFL cuts UNH, WLP. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Today’s Trivia:  What was Malcolm X’s birth name?
                                                                                                                                                           
Yesterday’s Question:  What mathematical symbol did math whiz Ferdinand von Lindemann determine to be a transcendental number in 1882?

Yesterday's Answer:  Pi.

Best Quotes: 


HEDGEYE

EARLY LOOK: YOUR GREATEST VICTORIES
"Never forget that sometimes your greatest victories can come from your greatest defeats."
-Drew Brees

Last week was a great week for global macro risk managers. By week's end, with correlation risk to the US Dollar running at all-time highs (Dollar UP = stock, bonds, commodities, etc. DOWN), a gigantic global mean-reversion trade captured victory.

With the US Dollar Index recouping +1.9% of its value (week-over-week), here were some of the major correlation moves:

1.       SP500 = -2.1% (the market's worst week in the last 3 months)
2.       Russell 2000 = -2.3% (we covered our short position last week)
3.       Euro = -2.9% (we shorted the FXE on 11/4 and remain short it)
4.       Commodities (CRB Index) = -3.2% (intra-week we moved up our asset allocation from zero to 3%)
5.       Oil = -2.3% (no position - we sold our oil on 11/3)
6.       Gold = -2.2% (no position)
7.       Copper = -1.3% (no position)
8.       Volatility = +12.9% (we sold our long VXX position on strength last week)
9.       2-year US Treasury yields = +13 basis points or +35% to 0.50% (we remain short SHY)
10.   10-year US Treasury yields = +26 basis points or +10% to 2.79% (we remain long PPT)

Putting price moves in context is always critical. Having been short the Burning Buck from June 7th to November 2nd, I get the bear case (DEFICITS + DEBT = CONGRESS). Inclusive of the US Dollar closing UP for the 2nd consecutive week, it's important to acknowledge that the Debauched Dollar is still down for 19 out of the last 24 weeks and has plenty to prove before it regains any semblance of credibility.

That said, THE risk management question this morning is: Can a TRADE higher in the US Dollar become a TREND?

TRADE, in Hedgeye speak = 3 weeks or less. Whereas a TREND = 3 months or more. Global macro TRENDs back-test with much higher batting-averages in our risk management model than TRADEs. However, all TRENDs start as TRADEs, so you have to be Duration Agnostic.

I bought the US Dollar (UUP) in the Hedgeye Portfolio on November 4th and I remain long of it this morning. Consensus is still short the US Dollar and I can assure you that consensus is not comfortable with that position.

Here are the lines that matter in my model for the US Dollar Index:

1.       TRADE = $77.11
2.       TREND = $80.69

What that means is that what was immediate-term resistance for the US Dollar ($77.11) is now support and there really is no significant resistance (provided that the USD Index continues to make higher-lows) up to the TREND line of $80.69. In other words, there's another +3.2% upside from Friday's closing price of $78.08 and, consequently, plenty of correlation risk over the intermediate term for anything priced in US Dollars.

So what can keep an immediate-term bid to the Debauched Dollar?

1.       The Euro going down on legitimate sovereign debt risks rising (Ireland, Spain, Greece, Italy, Portugal, etc.)
2.       Fed Heads continuing to get hawkish on the margin (Jeffrey Lacker joins Kevin Warsh and Tom Hoenig this morning)
3.       US Treasury Yields continuing to breakout to the upside (2-year yields charging higher again this morning to 0.53%)

I'm not looking for bullish catalysts - these simply are bullish USD catalysts - particularly when you consider the "Bye-Bye, Bear" cover story that Barron's was running on November the 1st. Bernanke's QG (Quantitative Guessing) experiment has been YouTubed by the entire free and communist world at this point. If you didn't know that QG = inflation, now you know. US inflation reports (PPI and CPI) will accelerate again sequentially when reported this week.

It's a mathematical fact that Dollars are priced as a basket of other currencies, so I don't think I'll get much pushback on the Euro DOWN trade equating to US Dollar Index strength. I'll definitely get pushback on the Fed Head thing - after all, the cornerstone of the Bull case on US Equities is built on Begging Bernanke for free moneys as insiders make their highest levels of sales since December.

On that not so little squirrel hunting signal that the world calls Mr. Bond Market however, it will be very difficult for people to ignore these immediate and intermediate-term breakouts in US Treasury Yields. This is very new. And the risks in the Treasury market are very real.

The 30-year bond has been breaking down, big time, since mid-October. Long-term interest rates breaking out in the US as sovereign yields spike in Europe were 2 of the main risk factors associated with my getting out of stocks and commodities altogether in late October. While some of my greatest 2010 defeats came in the first week of November, the greatest victories in global macro risk management are potentially on the come.

My immediate term support and resistance levels for the SP500 are now 1188 and 1211, respectively. I remain short the SP500 (SPY).

Best of luck out there today,
KM