“The secret is to work less as individuals and more as a team. As a Coach, I play not my eleven best, but my best eleven.”
Born in Voss, Norway, Knute Rockne was an American immigrant who coached college football in this country when the US Government didn’t have a perma-central plan for losers on the fields of finance to win.
Between 1, Rockne’s Notre Dame football teams amassed an amazing win/loss record of 105-12. He was not a qualitative analyst of the game. He was a chemist who learned how to change the game.
Re-think, Re-work, and Re-build – whether it was Rockne’s introduction of the forward pass, or Hedgeye’s vision of real-time risk management – this is the America that most of us love and believe in.
It was a great year…
I can say that tonight at the 4thannual Hedgeye Holiday Party. I can say that because we hired, net, more Americans than Bank of America, Citigroup, and Morgan Stanley, combined. I can say that because my team did so profitably (paid up +24% year-over-year). I can say that because we are building something, as a team, that no one can centrally plan away from us.
The Secret to our success is very simple. Whether you like our hockey learnings in life or not, my defense partner, Daryl Jones, summarized it best at our Company Meeting this week in New Haven:
“It’s the name on the front of the jersey that matters more than the name on the back.”
That’s what USA Olympic Hockey Coach, Herb Brooks, famously said. It’s different than what Knute Rockne or Vince Lombardi said about winning – but it’s really all the same thing. It’s The Secret of American success.
Back to the Global Macro Grind…
Yesterday’s intraday spanking of the S&P Futures came right on time with our catalyst – a failed European Summit. Failure, of course, being measured versus the market’s consensus expectations. With the SP500 dropping 34 handles from its Tuesday and Wednesday intraday highs, a -2.6% draw-down left a mark on Santa’s sleigh.
But where is old Saint Nick? We’ve done battle in the corners with any bull that wanted a piece of us in November. We’ve banged the boards for the home team on the “sell-high” side for the first 10 days of December. With the US and Global Equity markets down for both November and December, we’re calling this a win.
That’s just measuring success, of course, on our most immediate-term duration – at Hedgeye we call it the TRADE. And while many “long-term investors” don’t TRADE (or manage risk – same thing) like we do, we get that and also have a risk management framework that incorporates longer-term investor durations:
- Immediate-term TRADEs = 3 weeks or less
- Intermediate-term TRENDs = 3 months or more
- Long-term TAILs = 3 years or less
Like Rockne’s vision of the forward pass, our vision of risk management has more to do with Embracing Uncertainty across durations than it does locking ourselves into a certainty of style. Our style isn’t to be bullish. It’s definitely not to be bearish either. It’s simply to be right – and being Duration Agnostic helps accomplish that.
In US Equities, across durations, what’s the score?
- TRADE = The SP500 is down -1% for December, 2011
- TREND = The SP500 is down -9.5% from its YTD high (April 2011)
- TAIL = The SP500 is down -21.2% (still in crash mode) from its October 2007 high
Since we’re one of the only teams that writes what we think to you in real-time that nailed both Global Growth Slowing calls of 2008 and 2011, we can celebrate our process tonight for what it’s accomplished – helping become a part of your risk management process.
That’s The Secret. We can collaborate and partner with our clients in a way that Marcus Goldman could. We can learn much more from your teams, collectively, than you can learn from ours – and we like that. It’s ok to learn. It’s ok to say I don’t know. It’s ok to say hey, we’re winning out there, together, and we’re proud of it.
I personally want to thank my teammates and all of you. As a Canadian immigrant to America, it’s both a pleasure and a privilege to wear this Made in the USA jersey every day.
My immediate-term support and resistance ranges for Gold (bearish TRADE and TREND), Brent Oil (bearish TAIL and TRADE), Gemany’s DAX and the SP500 are now $1, $107.11-110.31, 5, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – December 9, 2011
With US Stocks down for both November and December, Santa is going to have to have one heck of a rally in the next 2 weeks for us to be wrong. I am hearing that central planners are considering moving the date on Christmas however. As we look at today’s set up for the S&P 500, the range is 17 points or -0.03% downside to 1234 and 1.35% upside to 1251.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: -2198 (-2370)
- VOLUME: NYSE 930.50 (-3.88%)
- VIX: 30.59 +6.70% YTD PERFORMANCE: +72.34%
- SPX PUT/CALL RATIO: 1.23 from 1.17 (+5.60%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 54.00
- 3-MONTH T-BILL YIELD: 0.01%
- 10-Year: 1.99 from 2.02
- YIELD CURVE: 1.770 from 1.880
GLOBAL MACRO DATA POINTS (Bloomberg Estimates):
- US Trade Balance (Oct); consensus ($43.7B)
- US Michigan Consumer Sentiment (Prelim.) (Dec); consensus 65.2
- Germany Nov final CPI +2.4% y/y vs preliminary +2.4%
- France Oct Industrial output 0.0% m/m vs consensus (0.3%), prior revised (2.1%) from (1.7%)
- UK Nov PPI; Output +5.4% y/y vs consensus +5.4%, prior +5.7%; Core output +3.2% y/y vs consensus +3.3%, prior revised +3.3% from +3.4%; Input +13.4% y/y vs consensus +13.2%, prior revised +14.3% from +14.1%
- Japan Q3 revised GDP +5.6% y/y vs cons +5.2% and initial +6.0%.
- China November CPI +4.2% y/y vs cons +4.4%. November PPI +2.7% y/y vs cons +3.3%. November industrial output +12.4% y/y vs cons +12.8%. November retail sales +17.3% y/y vs cons +16.9%.
WHAT TO WATCH:
- EU Backs $267 Billion for IMF as Draghi Hails Fiscal Pact
- Stocks Advance, Euro Rebounds After Summit; Italy Bonds Decline
- EU Leaders Drop Demands for Investor Write-Offs in Bailouts
- U.S. Money-Market Funds Cut French Bank Debt by 68% in November
- Toyota Lowers Annual Profit Forecast 54% After Thai Floods
- Cameron Wishes Euro Bloc Well as U.K. Negotiates Isolation
- Obama Defeats Romney in Global Poll Showing Republican Weakness
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Corzine’s ‘Intent’ Was to Head Off Possible Claims, Lawyers Say
- Gold Traders Most Bullish in Month on Debt Crisis: Commodities
- OPEC Deal May Falter on Saudi-Iran Supply Split: Energy Markets
- Oil Heads for Weekly Decline on Economic Concern, Europe Debt
- Extract Studies Options as $2.2 Billion China Takeover Looms
- Stocks, Euro, Italy Bonds Retreat as ECB Damps Debt-Buying Bets
- Gold Climbs in London on Concern About European Debt Measures
- Corzine, MF Global Executives Face Commodity Traders’ Lawsuit
- Malaysia’s Exports Rise More Than Estimated as Commodities Climb
- Gold May Drop 9.5% After Triangle Formation: Technical Analysis
- China’s Copper Output Declines to Five-Month Low in November
- Potash Corp. Reports Cutbacks at Two Saskatchewan Mines
- Extract to ‘Urgently’ Resume Partner Talks After China Bid
- Climate Talks Closer to Agreement on Plan with $100 Billion Aid
- Wilmar Beats China’s Cofco to Buy Proserpine Sugar After Vote
- INTL FCStone Starts Trading on LME Floor in Expansion of Metals
- Wheat Drops for a Third Day as Australia May Have Record Crop
- Indonesian Commodity Exchange Plans to Introduce Tin Contract
- Copper Declines in London After Car Sales in China: LME Preview
GERMANY – the most important Global Macro factor to solve for when analyzing a country = GROWTH. The Bundesbank cut their Growth estimate huge this morning for 2012 to 0.6% (from 1.8% prior). European Stagflation is what kills Equity multiples, and there is no central plan that can stop gravity (Growth Slowing). Next line of DAX support = 5776.
RUSSIA – I’ve been up for 2 hrs and have yet to see or hear someone mention that the Russian stock market is crashing (that doesn’t mean it ceases to exist) – down -4.3% this morning and down -33.5% from YTD high confirming 2 Big Mac-ro calls we had yesterday: A) Strong Dollar and B) Cutting our Asset Allocation to Commodities back to 0%. Brent Oil snapped its TAIL line of $110.42.
CHINA – just a market mess in Asia overnight led by what we know - an acceleration in Growth Slowing in China – Industrial Production came in at +12.4% (lowest report since 2009) and inflation dropped, sequentially, inline with our model’s estimate at 4.2%. Deflating The Inflation (positive) will take time too. Chinese stocks hit a 33 month low (down -24.5% from YTD high).
MIDDLE EAST (HEADLINES FROM BLOOMBERG)
- Iran Shows Off Downed Spy Drone as U.S. Assesses Technology Loss
- OPEC Deal May Falter on Saudi-Iran Supply Split: Energy Markets
- Libya’s Bey Rebuilds After Feeding Rebels Who Killed Qaddafi
- Qatar May Consider Investing in Euro Bailout, Handelsblatt Says
- Malaysia Yields at One-Year Low Defy Sukuk Drop: Islamic Finance
- Gulf Keystone CEO Faces $6 Million Tax Fine Over Offshore Assets
- Luke Donald Bounces Back From Slow Start At Dubai World Champions
- Saudi Arabia Is in No Rush to Get New OPEC Quota, Naimi Says
- Oil at $150 Becomes Biggest Options Bet on Iran: Energy Markets
- Daily Mail (GB): Dubai World Championship leaderboard: Keep up to d
- Video Rekindles Mystery Surrounding Former F.B.I. Agent Missing in Ir
- Masdar City Offers Glimpse of Carbon-Neutral Future Amid Delays
- EU to Consider Additional Sanctions on Iran, Summit Draft Says
The Hedgeye Macro Team
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The Macau Metro Monitor, December 9, 2011
Las Vegas Sands mulls over tourism complex in HCM City Vietnam News Agency
According to LVS Chairman, Sheldon Adelson, LVS plans to build a tourism complex in Ho Chi Minh City at a cost of more than US$2 billion. The complex, designed in the shape of two sails standing on a lotus, features hotels, restaurants, convention and exhibition centres, shopping, a spa area, gymnasium, theatre, museum and other entertainment places.
Once completed, the complex is expected to become a symbol of Ho Chi Minh City , attracting more tourists to the city. Le Thanh Hai, Secretary of the Ho Chi Minh City Party Committee, applauded LVS's idea of investing in the tourism and service sector in Ho Chi Minh City. He affirmed that Ho Chi Minh City wishes to cooperate with LVS in the project.
Conclusion: We don’t view the current income disparity in the U.S. as inconsequential; rather we expect to see that contribute to an increase in economic and financial market volatility over the long term as a result of heightened regulatory risk. This is an acute topic to keep in mind over the long-term TAIL.
Occasionally, intergovernmental agencies, like the OECD, publish detailed reports and datasets that we find useful in helping shape our big-picture thematic work. Most recently, we took a look at the data and conclusions provided in the OECD’s recent piece on global income inequality. Below we expand upon their baseline analysis to identify the potential investment implications of this international trend.
Data & Analysis
The OECD report provided data that shows income inequality generally increasing across the OECD, rising +9.7% over the last ~25yrs, on average, using the Gini coefficient as a standard measure of inequality. On this very measure, income inequality in the United States – which is the third-most unequal country in the survey – increased by +12.1% over the same time period. While not as dramatic as the deltas seen in the Nordic countries, it is a noteworthy delta as far as income inequality is concerned:
The OECD’s econometric analysis finds that the international trend in rising income inequality across developed countries was driven largely by changes in the distribution of wages and salaries – on average ~75% of household incomes among working-age adults across the OECD – and the change in hours worked across the socioeconomic distribution. The report finds that demographic trends such as ageing, a +700bps jump in the rate of “assortative mating” (i.e. couples where partners are in neighboring earnings deciles) to 40% on average, and a +500bps increase in the rate of part-time labor to 16% of the total employed population all played a key role in the aforementioned labor market developments.
On average, real disposable household income across the OECD grew at a +1.7% average annual rate over the last ~25yrs. The average annual rate of growth for the top decile was, on average, 1.4x times faster than the rate of growth for the bottom decile. In the U.S., that ratio was 3.9x – meaning the top 10% of wage earners in the U.S. saw their real disposable household income grow nearly four times as fast as those in the bottom 10% over the last ~25yrs.
Unlike the OECD average, hours worked did not play a substantial role in perpetuating income inequality in the U.S. In fact, those in the bottom quintile of the U.S. earnings distribution saw their mean annual hours worked increase by +26.2% over the past 20yrs. That compares to a decline of -1.5% for the top quintile and -7.3%/-0.7% across the OECD’s average earnings distribution.
Looking at gross incomes across the OECD, which are found to be 34% more unequal than disposable incomes, on average, we see that the top 1% of earners accounted for 9.8% of all income (as of 2008/the latest data) – up +336bps (or +52%) from 1980 levels. The U.S. saw an even more dramatic delta and absolute level of gross income inequality – up +949bps (or +116%) from 1980 levels to a setup whereby the top 1% of earners accounted for 17.7% of all income. Additionally, the share of gross income earned by the top 0.1% of earners increased by a factor of 4x in the U.S. over that timeframe.
All told, over the past 2-3 decades, both income inequality and the disparity in work ethic have risen dramatically in the United States relative to other developed economies. Additionally, the absolute levels of income inequality in the U.S. outpace levels seen in “peer” countries, suggesting that the U.S. may have more downside from a mean reversion perspective should the tide eventually turn – a topic we delve into more deeply in the analysis below.
Among the many derivatives of unmitigated income disparity growth is social instability and/or unrest (i.e. #OWS). If unaddressed for too long, the unstable social pulse may eventually contribute to political and regulatory instability – particularly in democratic societies such as the U.S. (one man; one vote).
In a less-tangible form, the data and messaging provided in reports like the OECD’s may perpetuate the social Zeitgeist currently brewing around the U.S. – a Zeitgeist that is built upon feelings of resentment towards higher income earners, as well as a gut feeling that the “game is rigged” in favor of the wealthy elite. Moreover, as constituents become more disgruntled, they are likely to demand that their elected representatives pursue protectionist measures, anti-globalization reforms, as well as additional oversight of the financial industry – the opposite of each are traditionally deemed as key contributors to income inequality in the developed world (though the OECD report claims to exonerate the former two).
As an aside, Chuck Schumer’s “anti-China” trade bill (S 1619) is an example of protectionist legislation currently being debated on by policymakers that could garner increasing support in the coming quarters. Refer to our recent note for more details. Obama’s “millionaire’s tax” idea and a potential rhetorical shift towards bad-mouthing the financial services industry – a strategy we contend he could pursue (like FDR did) if needed to galvanize populist support in the coming months – are to examples of real policy debates becoming increasingly focused on the heavily-skewed income distribution and financial services oversight.
While we have chosen to withhold our own opinions of what we think is the right mix of policy strategies to pursue for the country’s long-term economic and social prosperity (yes, both matter when policy is being designed), we do think that a shift in D.C. towards the aforementioned strategies is, on the margin, destructive to the U.S.’s 2012-15 economic outlook (and potentially beyond). Additionally, absent a major improvement in domestic labor market conditions, we can be all but assured some mix of regressive policy is likely to be pursued with increasing popular support – particularly if reports demonstrating inequality and unfairness continue to gain coverage at accelerating rates. The following articles demonstrate a shift of the reporting of popular skepticism and conspiracy theories away from lesser-known channels to larger media outlets:
- Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress
- Bloomberg News Responds to Bernanke Criticism of U.S. Bank-Rescue Coverage
- How Paulson Gave Hedge Funds Advance Word of Fannie Mae Rescue
- CBS News Special on Congressional Insider Trading: http://www.cbsnews.com/video/watch/?id=7387951n
All told, we don’t view the current income disparity in the U.S. as inconsequential; rather we expect to see that contribute to an increase in economic and financial market volatility over the long term as a result of heightened regulatory risk. This is an acute topic to keep in mind over the long-term TAIL.
Long live the principles of Transparency, Accountability, & Trust.
Note, as it relates to mix between footwear, apparel and equipment, the major athletic retailers stack up as follows.
We’re seeing a continuation of the trends that emerged over the past few weeks. Apparel up, footwear down.
Athletic Apparel trends were strong last week posting a sequential acceleration as compares start to ease headed into the holidays. Underlying trends remain intact with the trailing 3-week rate increasing to 15% from 13% and 2Yr trends still running in the high-teens. Footwear sales, however, continued to the downside with growth slowing in running (~34% of FW) and Basketball (~20% of FW). We had been seeing a bifurcation in the basketball category, in that ‘performance’ shoes continued to post negative growth (-5%), while ‘hoops-inspired’ (~45% of total basketball) showed more signs of life. This trend reverted this week with the “inspired” category deteriorating sequentially down -11% from +10% (See Chart Below).
Perhaps most notable in the athletic apparel space is the continued strength in ASPs, which are +LSD-MSD again this week in the face of the ASP boost last year that started in mid-November. This is consistent with recent trends reflecting less elasticity in specialty athletic compared to both the discount/mass and family channels.
Here is some additional color on last week’s brand/category performance:
- Top line trends in all of the primary apparel categories improved on the margin. The most significant accelerations came in the compression and outerwear categories, which improved from +5% to +23% (good for UA) and +27% to +44% (good for VF), respectively.
- An interesting callout is that last week was the warmest first week of December in 10 years. While we’d expect better traffic coming through the stores, we wouldn’t think that cold weather gear would be high on the list. But we continue to see share gains in outerwear despite a strong start to the season (see chart below). The North Face gained 270 bps while COLM lost 93 bps of market share.
- All of the apparel brands’ top line performance improved sequentially which is representative of widespread industry performance improving into December.
- Champion continues to be the primary underperformer in apparel with sales down 12.3% to the tune of an 86 bps loss in share. Again, we’d note that Champion is performing well at TGT, which is not represented in this data. But it also shows how the market is a zero sum game.
- Nike apparel had a nice spike last week, with sales growth improving sequentially up 12% from 7%, and 17% from 5% for men’s and women’s respectively.
- Nike apparel has been erratic, but it’s core footwear business remains strong -- up nearly 400 bps in share.
- FW sales at price points greater than $100 were negative for the first time in 4 months (Chart Below). While 85% of the athletic FW industry (per NPD) is made up of shoes below the $100 price point, the negative data point is indicative of the week’s overall underperformance.
- UA continues to gain momentum in footwear, with its top line accelerating on the margin. This is exactly what UA needs to show in order to clear its inventory glut. While 33% growth off of such a low base is not much in dollars, the brand is actually in the early stages of gaining share in the FW market.
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