Fed Fighting

This note was originally published at 8am on December 14, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Pick a fight.”

-Jason Fried & David Heinemeier Hansson


Seth Godin said “ignore this book at your own peril.” Tom Peters said “the clarity, even genius, of this book actually brought me to near tears on several occasions. Just bloody brilliant, that’s what.”


I gave this book to everyone on our team for a recent strategy session. It’s called “REWORK” and I think you can not only apply it to how you think about your company and portfolios, but how you think about your life. Learn, Unlearn, and Rework. It’s healthy.


Some people don’t like to fight. I do. Especially when I find someone on the other side of something that I am passionate about. If you’re going to pick a fight though, and take this from a 5 foot 9 inch hockey player, you better pick the ones you can win.


Conventional wisdom says don’t “fight the Fed.”


We live in unconventional times.


Not only do I think it’s a great time to pick a fight with the Chairman of the Federal Reserve, I think we can win.


“We” isn’t a group of passionate people in New Haven, Connecticut. “We” isn’t all of the Americans who are, pardon the pun, fed up with Big Government Intervention in our markets. “We” are the world’s risk managers.


The Chinese are fighting the Fed. So are the Australians, Brazilians, and Germans.  So let’s line up what’s in our corner this morning and go through who and/or what can help us engage in Fed Fighting:

  1. Global Inflation
  2. Global Bond Yields
  3. The US Dollar

Let’s go in reverse order and start with the US Dollar first. Last week the US Dollar was up another +0.86% for the week.  It closed higher for the 5th week out of the last 6 and +5.3% higher than its YTD low established on November the 4th (post QG2 and the midterm elections).


We’ve been long the US Dollar (UUP) since November the 4th in anticipation of both global inflation accelerating and globally interconnected risk compounding. We’ve also had a keen eye on the macro calendar catalyst pending in the new year of both Ron Paul being able to subpoena the Fed and Republicans having a mandate for American Austerity measures.


Global bond yields are chasing higher and breaking out on both our TRADE and TREND durations. Despite US Treasury yields selling off in the last 24 hours ahead of The Ber-nank’s FOMC decision today, they remain in a very bullish pattern – and, as a result, the entire bond market is in a very bearish immediate-term position.


The TRADE and TREND lines for 2s, 10s, and 30s across the US Treasury Yields curve are as follows:

  1. 2-year yields have TRADE and TREND lines of support of 0.49% and 0.46%, respectively.
  2. 10-year yields have TRADE and TREND lines of support of 2.87% and 2.68%, respectively.
  3. 30-year yields have TRADE and TREND lines of support of 4.26% and 3.94%, respectively.

All of these moves in US yields are being perpetuated by:


A) Asian yields rising on government interest rate hikes, and

B) European yields rising on both inflation and sovereign debt risk.


This morning’s Spanish 12-month bond auction yielded 3.44% versus 2.36% in the prior auction and inflation in the UK remained above the Bank of England’s token target, pushing to +3.3% in November versus +3.2% in October.


Global inflation has been driving bonds lower for the last 6 weeks. No matter what Ben Bernanke says about inflation in his statement today, the market is already running way ahead of him on this. Remember, markets don’t lie; politicians do.


Sure, you can make a case that in the face of tax cut extensions US growth expectations are rising as well. But don’t mistake short-term levered-growth (cutting taxes and ramping the deficit/GDP ratio) for sustainable organic GDP growth.


Whether it’s the price of the CRB Commodities Index (up +20.5% since the day in August that The Ber-nank decided to inflate), or the price of copper hitting an all-time-high of $4.22/lb this morning (+31% since August), I don’t think I’m alone in picking a fight with the Fed on this fine December day of 2010.


Global markets have my back. If you are politicking to debauch the dollar again today Mr. Bernanke, keep your head up.


My immediate term TRADE support and resistance lines for the SP500 are now 1226 and 1246, respectively. We remain short both the SP500 (SPY) and the short end of the US Treasury markets (SHY) in the Hedgeye Portfolio.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fed Fighting - 1

Strategist's 'Ron Paul' Trade: Avoid Stocks, Stay Long US Dollar


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Some brief comments from Sanderson Farms pertaining to sales trends and demand.


Food prices continue to rise and it is only a matter of time before this comes to impact the bottom line for restaurant stocks.  SAFM echoed many restaurant management teams in calling out unemployment as a key factor suppressing demand.  Some comments in the bullets below:

  • [On inflation] “Prices during our fourth quarter were higher by 26% when compared to the fourth quarter a year ago but were 2.4% lower than during our third fiscal quarter”
  • “Softness in the boneless breast market continues to reflect weakness in the market for almost all protein consumed away from home.  This includes the demand for white meat from all of our food service customers, including our casual buying customers and our food service distributors”.
  • Management continues to see lower consumption of protein outside of the home and they don’t expect to see a meaningful improvement in foodservice demand in fiscal 2011 until job picture improves
  • Demand for prepared foods was strong through the first week of November and then evaporated…

Howard Penney

Managing Director


Conclusion:  Retail sales came in strong today.  However, it is important to note that, on an absolute basis, the number is below where it was three years ago.  Sales growth for the Food Services & Drinking Places sector is more anemic than it is for total Retail Sales.

On the back of the strong retail sales numbers, I want to continue with my theme from Monday's Early Look titled, “The Pursuit of True Wisdom.”


As it related to the consumer spending it’s an appropriate time to reflect upon (1) What has transpired? (2) Where are we headed? and (3) What is left undone?


First some details.  Retail sales jumped 0.8% in November in total, on top of an upwardly revised 1.7% gain in October.  Clearly, the consumers have clearly picked up the pace of their spending (on the heels of increased optimism as the market heads higher); sales less autos growth was even steeper in November at 1.2%, up from 0.4% last month.  Is the potential for pent-up demand real?


Sales in November were strong (up for the 4th consecutive month) in nearly all categories outside of housing-related segments.  Top-line sales growth have risen at least 0.8% in each of the last four months and averaged 1%.


Growth in November was led by gas stations (+4%), department stores, apparel stores (+2.7%), sporting goods and hobby stores (+2.3%), and nonstore retailers (+2.1%).   On the declining side Motor Vehicle& Parts (-0.8%), furniture stores (-0.5%), electronics and appliance stores (-0.6%), and building supply (-0.01%).  Restaurants were another noteworthy laggard, up only 0.1%.


What has transpired?

  1. Income is improving
  2. The consumer has deleveraged but will continue to do so at a slower pace
  3. Debt payments have declined dramatically
  4. Stock market gains are also lifting the spending of higher-income households
  5. Pent-up demand is being released

Where are we headed?

  1. Year-over-year growth is likely to slow because comparisons get much more difficult.
  2. House prices are falling again, contributing to consumers' continuing need to rebuild their balance sheets
  3. Rental income is up, likely as a function of the soft housing market
  4. Consumers are doing little borrowing
  5. In this environment, spending will continue but it is unlikely recent growth is sustainable

What is left undone?

  1. Additional support will come next year in the form of reduced taxes and increased unemployment insurance benefits if the tax compromise passes
  2. Unemployment is high, and job gains have not been consistent enough or sufficient to put any downward pressure on the unemployment rate

The strong November growth, combined with upward revisions to the prior two months, shows sales growing at a 13% annualized pace over the last four months.  However, some perspective is in order. Even following this period of outsize growth, sales remain slightly below the November 2007 peak.  In essence, sales are at the same level they were three years ago.


The first chart below shows Retail Sales for the Food Service and Drinking Places sector.  While the sector performed with relative resilience during the recession, it will be interesting to see whether this level can be maintained when comps become materially more difficult in February. 


The second chart illustrates total Retail Sales.  While November 2009 was the first month of year-over-year sales growth following the recession, growth was only 1.8%; it grew to 5.5% in December and topped 8.5% and 8.7% in March and April, respectively.


RETAIL SALES - FOOD SERVICES & DRINKING PLACES - retail sales food services nov




Howard Penney

Managing Director

Fed Fighting: Bernanke Obfuscates

POSITION: Long US Dollar (UUP), Short short-term Bonds (SHY)


Here’s The Ber-nank’s key statement:


The Fed “continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period."


Here’s reality in the most important part of the US equity market being infused with unprecedented Big Government Intervention: 

  1.        Financials (XLF) – November 1st-5th  = UP +7.1%
  2.        Financials (XLF) – November 5th-23rd = DOWN -7.5%
  3.        Financials (XLF) – November 30th-December 14th = UP +8.8 

All the while, commodity inflation is putting on massive moves to the upside and there are very few things trading with more volatility than the price of volatility itself.


On the score of “price stability”, Bernanke has effectively become the world’s running joke. He doesn’t get real-time markets or how he affects them. That’s scary.


We’re Fed Fighting (Long UUP, Short SHY) because we think that Big Government Intervention perpetuates market volatility and shortens economic cycles. Why? That’s simple – people don’t trust government’s long-term resolve in the face of short-term politicking.


While the aforementioned language is meant to obfuscate fact from storytelling, we don’t think that either the US Dollar or US Treasury market is suffering any fools right now. They get it. Pull up some 6-week charts.


On “subdued inflation trends”, we’ll refer Bernanke to the inflation that’s on your screen.



Fed Fighting: Bernanke Obfuscates - 1

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