Keith McCullough talks to Bloomberg's Dierdre Bolton about Jobs, the Dollar, Quantitative Guessing and more.
Keith McCullough talks to Bloomberg's Dierdre Bolton about Jobs, the Dollar, Quantitative Guessing and more.
Conclusion: We at Hedgeye aren’t alone in our stance that the Fed’s Quantitative Guessing won’t end well. Several important countries and figureheads have joined in the anti-QE parade and we feel that this, combined with other factors is bullish for the U.S. Dollar – and bearish for [nearly] everything else.
Position: Long the U.S. Dollar (UUP); Short the S&P 500 (SPY); Short the Russell 2000 (IWM); Short Emerging Market Equities (FFDs);
On our Morning Macro Call (email if you are an institutional client and need a live dial-in code), Keith identified three catalysts that are potentially bullish for the U.S. dollar in the near term, which could potentially trigger a 6-9% compressed correction in U.S. equity markets. Those catalysts are:
On another note, it seems everyone is bearish on the U.S. dollar and bullish on commodities and global equities, including Franklin Templeton’s Mark Mobius. More signs that dollar bearishness are at its peak are:
Clearly, we were early and right calling the accelerated decline in the dollar starting this summer, but evidence is continuing to mount that a weak dollar is solidly consensus. President Obama and his cabinet will see mounting pressure over the next two weeks to adjust their policy towards the dollar as they travel abroad. Longer term, it is not in their best interests to ignite a currency war, so we would expect their rhetoric to adjust accordingly and be supportive of a stronger dollar policy.
Have a great weekend,
R3: UA, LVMH, Cotton, & HOTT
November 5, 2010
OUR TAKE ON OVERNIGHT NEWS
High street giant vows to increase prices by 8% to protect profits in face of rocketing cotton costs. Next stands to lose £60m profit in the first half of 2011 if it does not pass the spiralling cost of cotton on to customers, according to chief executive Lord Simon Wolfson. Wolfson this week lambasted a report by analysts Investec Securities which claimed the price of the average autumn shopping basket at Next had already surpassed its equivalent at Marks & Spencer for the first time in a decade - but conceded the retailer would be forced to pass on price hikes of about 8% next year. <drapersonline.com>
Hedgeye Retail’s Take: One of the most vocal examples of cotton inflation and its impact on retail. While most have been dismissive about cotton’s impact and strategies to deal with it, Next is about as clear as can be. Cotton up, AUR’s up.
UA Sponsoring Manhattan’s Largest Sports Complex- Under Armour Inc. has inked a deal with Chelsea Piers, a sports and entertainment complex on the West Side of Manhattan, to be its official athletic apparel and footwear sponsor. Under the terms of the deal, Under Armour will outfit the trainers, coaches and instructors at the Field House, which offers indoor soccer, basketball, batting, rock climbing and gymnastics, as well as at the center’s health club. The brand will also be the exclusive athletic performance apparel to be sold at the two venues. Other Chelsea Piers sponsors include Izod, Capital One Bank, Coca-Cola, Johnnie Walker and Jet Blue Airways. <wwd>
Hedgeye Retail’s Take: While not on the same caliber of a Tom Brady signing, the grassroots local sponsorship is more akin to the company’s core marketing efforts.
Jimmy Choo One Step Closer to Lifestyle Brand- Tamara Mellon has unveiled the latest iteration of the Jimmy Choo brand — fragrance. Beginning in January, the brand’s eponymous first scent, created with Inter Parfums SA, will be introduced. “We’ve transitioned into a lifestyle luxury brand, and it seemed like the next natural step for us,” said Mellon, founder and chief creative officer of Jimmy Choo, at a London event to launch the fragrance last week. A similar event was held in New York on Tuesday. “Fragrance is such an important accessory for women — I think it will have a very broad reach. Our customer is every woman.” <wwd>
Hedgeye Retail’s Take: With shoes, handbags, and now fragrance we wonder how long before apparel enters the Jimmy Choo line up?
LVMH/Hermes Soap Opera Evolves- France’s market regulator AMF will investigate LVMH Moët Hennessy Louis Vuitton’s acquisition of a 17.1 percent stake in Hermès International to determine if rules were respected, an AMF spokeswoman said on Friday. LVMH filed a statement on Oct. 23 revealing that it had purchased more than 15 million shares, representing 14.2 percent of Hermès, and had options for another 2.9 percent. In France, companies are required to declare stock purchases when they surpass 5 percent of the share capital. Luxury mogul Bernard Arnault’s group said it achieved the Hermès stake through several cash-settled equity swaps, in which an investor essentially bets on the future value of a stock without actually owning the underlying shares. <wwd>
Hedgeye Retail’s Take: As expected, this luxury house showdown continues to heat up. Most likely a page one store for many weeks to come, especially in Paris.
Oil on the Rise, Biking Looking Attractive?- The League of American Bicyclists and the Alliance for Biking & Walking announced a three-year campaign to double federal funding for bicycling and walking by 2013, even while bemoaning the defeat of one of their great champions in Congress in Tuesday's mid-term election. The League and Alliance have been awarded up to $1.2 million from SRAM over the next three years to unite active transportation advocates across the nation and give them tools and resources to secure increased funding from existing federal transportation programs for critical bicycle and pedestrian projects. <www.sportsonesource.com>
Hedgeye Retail’s Take: This may be the first time we’ve included a blurb on cycling but probably not the last as many urban centers have and will become much more biker friendly over the next several years. Did anyone initially believe NYC would permanently close traffic in Times Square to accommodate bikers?
Nielsen discloses flaws in how it measures online traffic- Audience measurement firm The Nielsen Co. today told its clients that its data for traffic to online sites is flawed. The company put most of the blame on its failure to properly account for longURLs, such as those used by shoppers when following links from a search engine to an online retail site. Nielsen said it expects to have fixed the problem in time for December reports, which will be released in January. <internetretailer.com>
Hedgeye Retail’s Take: Interesting that even the data-driven internet can’t be tracked with a high level of accuracy. Not good for what was once thought as THE king of measurement statistics.
Hot Topic Debuts Harry Potter Boutiques- Warner Bros. Consumer Products and retail partner Hot Topic are launching dedicated in-store boutiques with exclusive merchandise inspired by Harry Potter and the Deathly Hallows. The boutiques are opening in Hot Topic's 680 locations in the U.S. and Canada. Exclusive product includes juniors', young men's and women's apparel (i.e. Gryffindor and Slytherin polo and tie combination tees), bags, throws, jewelry, key chains, stationery and posters. Select items will also be sold only online at Hottopic.com. In addition, an in-store mobile application will offer challenges and rewards to shoppers who participate through their iPhone and Android phone. Harry Potter and the Deathly Hallows: Part 1 hits theaters on Nov. 19. <licensemag.com>
Hedgeye Retail’s Take: Hard to believe that a retailer primarily known for goth and punk is going all-in on Harry Potter. Clearly they expect to attract a different audience than the 7-10 year old Quidditch fan.
Li & Fung to source for Li Ning brand- Hong Kong-based multinational Li & Fung, the global consumer goods exporter, will become a sourcing agent for Li Ning’s brands in both international and domestic market. The agreement will cover sourcing for a certain range of brands in both international and domestic China market, including soft goods for Li Ning’s popular running, basketball and lifestyle lines. <fashionnetasia>
Hedgeye Retail’s Take: Even the Chinese need Li & Fung to navigate their own factory base. Clearly a vote of confidence for the world’s largest sourcing conglomerate.
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Our sources tell us that CMG CEO Ells has actually been poking around this Momofuku store in NYC. A loose association but an interesting data point.
Momofuku is more high end NYC, his underlying concept mixes asian flavors with high quality ingredients.
At one point at one of his places he also offered a korean style burrito called a Ssam. The main restaurant, Momofuku, runs an open kitchen and is primarily counter seating.
If you are in NYC its worth a look....
This is also of interest
TODAY’S S&P 500 SET-UP - November 5, 2010
As we look at today’s set up for the S&P 500, the range is 36 points or -2.54% downside to 1190 and 0.4% upside to 1226. Equity futures are trading lower tracking an early sell off among European equities and ahead of the key US jobs data due later. Concerns over the state of the economies of Spain and Ireland linger over markets. The focus will be on the Oct employment report at 08:30 ET. Sep Pending Home Sales
CREDIT/ECONOMIC MARKET LOOK:
“Oh, Andy loved geology. I imagine it appealed to his meticulous nature. An ice age here, million years of mountain building there. Geology is the study of pressure and time. That's all it takes really, pressure, and time.”
-Red, The Shawshank Redemption
On a daily basis, we grind through a constant channel of noise. E-mails, instant messages, text messages, Bloomberg messages, and phone calls all can interrupt our train of thought. Generating valuable investment ideas for our clients in real-time requires pressure (effort) and time (focus) so at Hedgeye we value the time we take away from the various stimuli that surround us for so much of the day so that we can share ideas across sectors, discuss ideas with clients, or simply think in solitude. As Keith referenced in his Early Look titled, “AMERICAN SOLITUDE” last week, solitude and leadership often go hand-in-hand.
That said, I think I can speak for everyone at the firm when I state that the unique nature of our business model offers valuable dialogue channels with our clients. The nature of that dialogue can vary broadly, agree or disagree, angry or calm, data based or pure qualitative opinion. The fact is, all of it is critical to our process and all of it is appreciated.
Besides the wide array of views we receive from our exclusive network, the disparate perspectives of our readers are also a key differentiator for our firm. We hear from people managing billions and we hear from people managing a few thousand from their bedroom.
While I am sensitive to the trust our clients have in us, I think it is important to highlight one of the more powerful thoughts that have come across our screens lately:
“What is the relatively small retirement investor to do? He is long stocks--that is what has been taught to him over 80 years. He is long on American patriotism and innovation. He is disgusted with American politics. He is naive on currencies, trade, global economics and the bigger picture. He has income investments that he needs to pay the bills. He lives in fear of the next bubble bursting.”
The reason why I think this thought is powerful is that it highlights a lot of the ideological dogmas that shackle people’s investment perspectives. That is not a criticism, and I am not claiming to be immune to the influence of emotion or groupthink. The best one can do is to be aware of it. The above thought highlights several handcuffs that need to be removed in order to hold as dispassionate and lucid a view of the markets as possible.
1) American Patriotism, while admirable, should not be confused with American Delusion. I love my country (Ireland) as much as the next man. Thinking critically, especially about government and the path of the country, is a necessary feature of a democracy.
2) American innovation is not what it used to be. Some in the media may pine for the days when auto stocks used to “double and double” as soon as “they get going”, but this theme doesn’t sit well with our data-based conviction that Jobless Stagflation (inflation accelerating, growth decelerating) is here to stay.
3) Currencies, trade, global economics and the bigger picture are all part of the same patient that we examine each day. Interconnected markets are here to stay. We strive to fully respect that fact in the positions we hold in the Hedgeye Virtual Portfolio; we are short the Euro and long the Dollar, while being short the S&P 500.
The last sentence of our client’s message is powerful. Living in fear of the next bubble bursting is certainly a powerful engine driving market sentiment. Whether it’s the “relatively small retirement investor” that “needs to pay the bills” or the banker that wants to get paid at year end, fear is a very persuasive mechanism. In the end, we are as grateful to hear the perspectives of our individual investors as we are to hear the views of our most successful PM’s.
In Ben Bernanke’s op-ed in the Washington Post, published yesterday morning, he writes that the dual mandate of helping promote increased employment and sustain price stability compelled the FOMC to announce its intention to buy an additional $600 billion of longer-term Treasury securities by mid-2011.
The introduction to his piece refers to the actions taken by the Federal Reserve and other governments to “stabilize” the crisis in 2008 with a clear aim of claiming legitimacy for further quantitative easing in 2010. In that same vein, I would refer to the uselessness of past forecasts by government employees like Bernanke and Christina Romer, former chairwoman of President Obama’s Council of Economic Advisers (remember the prediction of 8% being the “peak” of unemployment?). When Keith coined the term Quantitative Guessing, he was not being flippant; these people do not – and cannot be expected to – offer anything more than guesswork in their economic forecasts.
What does not involve guesswork is the monitoring of real-time market prices. The impact of QE2 on the markets is clear to see in the data. As the dollar has declined, oil, gold, corn, cotton and many other commodities have seen parabolic moves to the upside. The jobless claims numbers yesterday underscore the dire circumstances that America’s unemployed find themselves in. The actions of the Federal Reserve are not even close to meeting the expectations that the government set. With respect to the “dual mandate” of the Federal Reserve, it is failing on both counts. The consumer is experiencing inflation and job growth has been rather disappointing.
An intuition exists among the American public that I am convinced is lost on many inside the beltway in Washington. The 401(k) is a significant depository of wealth for the American people so the fear of the “relatively small retirement investor” is understandable. That investor can see and hear the realities of the economic situation. The realities of the economy are all around for us to see - 43 million people on foods stamps and growing; a foreclosure crisis that shows no signs of abating and will likely get worse before it gets better. Investing under a cloud of fear of the bubble bursting is exactly the kind of position we do not want our clients to be in. In the end, all it will really take for the “Bernanke Bubble” to burst is pressure and time.
In The Shawshank Redemption, the result of Andy Dufresne’s meticulous application of pressure and time resulted in him burrowing out of a prison over a twenty year period using only a small rock hammer. As those of you who have seen the movie will remember, the prison warden was shocked to say the least. Pressure, sustained by time, can work both ways. In 2010 America, the pressure is being provided by a broken political system, government-sponsored inflation, and a merciless devaluing of the dollar. All else that is required is time.
One thing is for sure, we will not be complacent. The last thing we want to do is look like the warden of Shawshank when he realized what had become of Andy Dufresne. As you can see in the chart below, the VIX Index has traded below its 15 year average. Being bearish at this point is not consensus and we are down 2.18% on our short position in the S&P 500. Yesterday’s move was significant but our conviction has not wavered that the largely policy-induced pressure building inside the market is reaching a critical point.
Time is ticking and pressure is growing.
Have a great weekend,
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