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As the dollar gained and gasoline prices came down over the past week, grains led to the downside which is a positive leading indicator for food processor margins.  We can expect that benefit to flow through to restaurants in time but, as we have highlighted before, building up the U.S. cattle herd will take time; it is likely that prices will remain high absent exogenous factors like an escalated BSE outbreak or persisting “pink slime” concerns. 


Besides dollar strength, the USDA report published today detailing World Agricultural Supply and Demand helped push corn lower.  Corn stocks were pegged higher than expected. 


Coffee is another commodity that we would highlight; despite dollar strength and continuing concern about economic weakness in Europe, Arabica coffee gained 1.6% over the past week.  Year-to-date, coffee is down 23%. 







Gas prices coming down are benefiting consumers as the dollar strengthens and this should be a positive for restaurants and grocers as consumers drive and grill more during the summer months.









Supply: Columbia said that the harvest rose 11% in April and may continue to rise for the remainder of the year.   


Demand:  Speculation that demand will continue to show strength despite eurozone concerns fueled the coffee gain today. 


Comments:  Falling coffee prices are good for company margins as long as demand is not falling so fast as to impact sales to a significant degree.  Starbucks has its coffee needs locked into fiscal 2013.  Peet’s has its coffee costs locked though 2012 at increasingly favorable prices throughout.  Last year was a difficult year for Peet’s from a cost perspective. 





Supply: Egg sets placements continue to contract at around the same rate, -5%, according to the Broiler Hatchery report released by the USDA today. This implies that supply will remain tight as the industry looks for more favorable business conditions before expanding production. 































Howard Penney

Managing Director


Rory Green



KSS: 1Q12 Report Card


KSS is finally taking steps to adjust its pricing strategy a full quarter after JCP implemented its new EDLP approach in February. We’re rarely (if ever) a fan of reactive strategies and this one is no different. KSS will now be more aggressively fighting for share – that’s great, but others have already been taking it for the last 3-months now such as Macy’s, the off-pricers (TJX/ROST), etc. Increased competition in the mid-tier that will ultimately drive increased margin pressure is here and officially heating up. This isn’t good for KSS, or the companies that rely heavily on this channel for distribution such as CRI, HBI, GIL to name a few.


What Drove the Beat?

KSS posted a very low quality SG&A driven beat for the quarter with both revenues and gross margins coming in soft. A few points of note here:

1) Revenues were light. We knew that last Thursday and now KSS is going to try to drive traffic with lower pricing. This didn’t work out so well for JCP. We expect an uphill battle ahead for KSS as well. Not good.

2) Gross margins also came in below expectations. While some portion of this degradation was due to the new pricing initiative, KSS’ sales/inventory spread is virtually unchanged and still among the worst in the mid-tier. That’s very gross margin bearish over the intermediate-term.

3) SG&A was the saving grace in the quarter coming in down (-0.2% adj) yy vs. guidance of +3.5%. We’d prefer to see KSS invest in remodeling some of its tired store base rather than pulling this lever so heavily to make EPS. It may indeed help manage earnings near-term, but that’s no good for F13 earnings growth sustainability. 


KSS: 1Q12 Report Card - KSS SIGMA


Deltas in Forward Looking Commentary?


In order to properly measure performance relative to original expectations, we look at management’s 2012 guidance headed into the quarter as well as the key deltas in Q1 results vs. expectations :


Q1 FY2012

  • We’re projecting a total sales increase of 3%, comparable sales increase of 1% MISS: Sales +2%, Comps +0.2%
  • By month, we expect February to be slightly below the quarterly guidance, March to be higher than the quarter, and April to be slightly below the quarter INLINE: KSS missed consensus 2/3 months
  • We’re projecting a gross margin rate decline of 160BPS MISS: Gross Margins down 220bps due primarily to increase promotional activity
  • SG&A expense dollars are projected to increase 3.5%, depreciation expense of $205mm, interest expense of $81mm, a tax rate of 38%, share count of 245mm diluted shares LOWER: SG&A -0.2% (adj), tax rate of 36% added $0.01 to EPS
  • And we’re also projecting share repurchases of about $305mm for the quarter, at an average price of approximately $53 per share
  • Including these estimated share repurchases, we expect earnings per diluted share to be $0.60 for Q1 BEAT: $0.63 vs $0.60

Full Year 2012

  • The following metrics are for FY2012: Total sales increase of 4.5% UNCHANGED
  • Excluding the impact of the 53rd week, we expect total sales to increase 3.5% UNCHANGED
  • A comparable sales increase of 2% UNCHANGED
  • A gross margin rate decline of 70BPS. UNCHANGED though not reiterated due to incomplete fall spending; 2Q SG&A to be down 200-250bps with 2H SG&A down YoY
  • SG&A is expected to increase about 3% for the FY, and 2% if you’re excluding the 53rd week UNCHANGED
  • Including estimated share repurchases, we expect earnings per diluted share to be $4.75 for FY2012 UNCHANGED


  • From a capital spending perspective, we expect CapExs to be approximately $825mm in 2012 UNCHANGED
  • We expect to open 20 new stores in 2012, eight in March and 12 in October REDUCED- Opened 9 stores in Q1 with 10 planned for the fall
  • We’re temporarily reducing the number of remodels to approximately 50 stores in 2012, as we look to potential changes to our stores to increase sales productivity as well as provide more efficiency UNCHANGED- remodeled 40 in Q1 with 10 planned for the Fall



Highlights from the Call:



  • Sales +1.9%, Comps +0.2%
  • AUR +4.9%, UPT -3.3%=average trans +1.6%
  • Transactions/store down (-1.4%)
  • E-Commerce: +34% ~$250mm
  • Private/Exclusive brands were 53% of sales
  • Growth was hindered by lack of inventory units in stores (entered quarter down 6% in units and 9% in seasonal categories)
  • Seasonal category unit inventory was down as much as 20% in the quarter
  • Planning unit inventory flat at the end of Q2 to drive sales demand though levels will continue to hinder 2Q top line

Category Performance

  • Men's, Children's & Accessories outperformed the company average
  • Men's strength in casual sportswear, basics, dress shirts and young men's
  • Children's led by boys & girls
  • Accessories strength in fashion, handbags, sterling silver & watches
  • Women's essentially flat- active and updated sportswear strongest +LDD
  • Footwear slightly negative despite LDD growth in women's shoes
  • Home down LSD; strongest performance in tabletop, bath & towels
  • Sales in Rock & Republic exceeded expectations

Regional Performance:

  • Cold regions outperformed warm (Mid Atlantic, Midwest, Northeast vs. South Central, Southeast, West)
  • Midwest & Northeast +LSD
  • Southeast and South Central down (-LSD)
  • West down (-MSD)

Store Productivity Testing:

  • Testing 50 store in Houston, Atlanta, Salt Lake City
  • Test includes expanded home selection
  • Expect to add 2 additional markets with 20 stores for back to school
  • Will make changes to remodels based on results of testing


  • Credit share 56%, +270bps

Gross Margin:

  • GM (-220bps; had guided to -160bps)
  • Difference between actual -220 vs expectations -160 primarily due to promotional markdowns
  • Clearance levels similar to expectations
  • Gross margin guidance reflects customer response to new reduced pricing strategy


  • SG&A  -0.2% adjusted (had guided to -3.5%)
  • Credit  business generated leverage in the quarter which is expected to moderate
  • Most all stores reported lower costs as percent of sales
  • Strongest improvement in store payroll
  • Advertising did not leverage due to support of new brand launches

D&A: $201 vs. $191 last year

  • Increase due to new stores & additional e-commerce fulfillment centers

Interest Expense: +$6mm YoY

  • Due to $650mm of long term debt issued in October 2011


  • Currently 1134 stores, opened 9 stores, relocated 1, closed 1 in 1Q12

Inventory: +7%

  • Inventory/store +3.7%

Capex: $177mm vs. down $44mm YoY

  • Decrease reflecting lower spending on remodels/new stores/e-comm fulfillment partially offset by higher technology spending.
  • Opened 9 stores this year & last year; planning 10 stores this fall vs. 31 last fall.
  • Also reduced remodel plans from 100 last year to 50 this year.
  • Remodeled 40 stores in Q1 with 10 planned for the fall
  • Spending on 4th e-commerce facility ramping now




2Q Guidance:

  • Sales +2-3%, comp sales flat to +1%
  • Expect May below, June in line and July well above quarterly comp
  • GM decline of 200-250bps
  • SG&A will be flat to +1.5%
  • Depreciation of $206mm
  • Interest Expense of $80mm
  • Tax rate of 38%
  • Share count 241mm diluted shares (repurchasing $250mm at an avg price of $50/share
  • Expecting EPS of $0.96-$1.02

Full year

  • EPS remains at $4.75/share
  • Expect Gross margin to improve in the fall season but remain down YoY
  • Apparel costs are down for the Fall season in the MSD range which will help gross margins





Marketing Program:

  • Advertising expenses deleveraged in 1Q, would not expect leverage in 2Q
  • Expect to do better on the comp with more units in 2H and hope to leverage marketing in the back half
  • Lapping launch spend for Jlo in 2H which should create leverage
  • Customers will see price points very clearly in new ads and in the store
  • Message will be that it is exciting to shop value in stores

Operating Expense Control:

  • Saved on electricity spending in the quarter, spending down 4-5% in 1Q
  • Majority of savings came from store payroll
  • Saved on snow control in the quarter from more mild winter

Market Share Opportunities:

  • Biggest opportunity remains internal, a lot of changes taking place in the industry
  • Generating store to store success that has been seen in the past will be a result of better pricing, better product
  • Understand the changes that need to be made to the merchandising assortment

Result of Pricing Strategy:

  • Reduced a lot of opening price points in private brands which resulted in an acceleration in unit demand
  • Dramatic change in sell through as pricing was adjusted
  • Did not have the depth of inventory to support the unit growth which translated into the top line
  • Did well with newer brands in the portfolio (Rock n republic, J Lo, Marc Anthony)
  • Changing the value is making a difference in how customers view the product
  • Majority of gross margin pressure was in the private brands where prices were taken down the most but costs increased the most


  • Starting to see cost reductions so units might be up but costs down
  • Inventory up 3.7% on a per store basis
  • Units were down 6% in stores, expect to end the store on a unit basis as flattish
  • Expect 2Q inventory to be up MSD-HSD on a per store basis
  • Will be less aggressive on classic inventories on the missy side
  • Inventory growth will not be across the board- being smart about unit opportunity
  • Private brands were definitely hurt by the lack of units

Merchandising Opportunity:

  • Biggest opportunity is holiday
  • Really underperformed in 4Q11 in particular around more gift related categories- focus of 2012
  • Opening price point was an area of underperformance which was a function of more inventory support
  • 30% plus of the business is opening price point private brands
  • Need to continue to introduce news brands and will have announcements to share later in the Q but its more important to have new styles and new colors

Credit Uptick

  • Not coming from approval rates, new approval requirements have made this more difficult
  • Making changes from the scorecard perspective in June/July that should help approval
  • Really showing that you can get additional value by signing up for a Kohl's card
  • Expect the credit rate to continue to increase over time
  • Credit increase near $20mm- will continue to be a benefit throughout the year but not as good
  • Credit built into the guidance

JC Penney:

  • Difficult to quantify without knowing sales
  • If sales were up YoY, KSS most likely lost share to JCP

Comp cadence:

  • Missed a great deal of business in July last year resulting in this year's July comp above the quarter
  • Ran 2 credit events in June last year so comp expected to be in line with the quarter
  • Feel the company will be better positioned to drive sales later in the quarter

New store prototype/store remodels

  • Testing the expansion of home
  • Looking at other areas that aren't as productive as the overall stores but tests wont be done in 2013
  • Expectation for new stores in 2013 continues to be ~20
  • Remodels- will most likely stick to 50 remodels in 2013 based on test results

SG&A- Online infrastructure spend:

  • Guiding to an SG&A leverage point of 2%
  • Undergoing a profit improvement project throughout the entire company (5 total)
  • Expect to finish 2/5 projects by the end of year

Fashion Trend Response:

  • Experience in fall/holiday caused the company to rethink the entire buying process
  • Not dissimilar to 9 years ago when the company required a full rethink
  • There have been a tremendous amount of changes primarily in the buying and planning organizations
  • Focus around exclusive brands and the need to be more trend right has caused changes in the product development area as well
  • Working to buy more product on trend- merchants are chasing sales

New Prototype

  • Driven by e-commerce, recognition that online which continues to grow at a high rate is a potentially cannibalization of brick and mortar retail
  • Thinking long term in terms of sustained high growth in e-commerce and what it means for brick and more locations

Elasticity in Kid's

  • 2 areas where it was clear pricing would change trajectory of demand were children's apparel and broadly across the store in great value/key items (not in one particular category)
  • Saw acceleration in sell through rate as pricing was adjusted
  • Solid basis backing pricing decisions being made for the Fall

Full year Gross Margin:

  • Have not complete fall plans but expect margins to be down in the fall though improved over 1H
  • SG&A could be better than Fall guidance
  • Full year unchanged but not reiterated
  • Stock buyback of 250 in 2Q could be conservative, considering additional debt in 2H to buy back more stock

Executive changes:

  • New executive team will be driving the e-commerce business
  • Could accelerate growth even further in Fall Winter
  • Have made changes that could have major impact in juniors business during back to school
  • Certain areas will be impacted faster than others

Store Growth

  • Will continue to open stores which is largely above the rate of competitors
  • Objective about the need to solve some internal issues and will be in a position to consider new opportunities to grow
  • New stores have not been hitting the pro forma over the past couple of years due to the economy being different than it was when initial plans were in place
  • Could accelerate the 20 store growth as new store productivity improves 


Is the Jobs Data Getting Better or Worse? It Depends Whether You're Looking at the SA or NSA data.

Initial claims rose 2k last week to 367k (falling 1k after a 3k upward revision to last week's data). Rolling claims fell by 5.25k WoW to 379k. On a non-seasonally adjusted basis, claims rose 5k to 338k.


We've been vocal in highlighting the seasonality distortions taking place in the data, and how they'll continue to act as a headwind through the July/August peak effect. That said, it's also important to highlight the other side of this, which is that the real numbers are actually improving. Consider the chart below, which shows the year-over-year change in the non-seasonally adjusted data. By this measure, the data continues to steadily improve at a rate of roughly 10% per year, indicating the underlying health of the jobs market remains on track. Nevertheless, we believe that a majority of investors rely primarily on the printed, seasonally-adjusted number, and, as such, regard the environment as moving sideways to up.  
















2-10 Spread

The 2-10 spread tightened 9 bps versus last week to 156 bps as of yesterday.  The ten-year bond yield increased 10 bps to 182 bps.






Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 


INITIAL CLAIMS - WHAT'S REALLY GOING ON? - Subsector performance




Joshua Steiner, CFA


Allison Kaptur


Robert Belsky


Having trouble viewing the charts in this email? Please click the link at the bottom of the note to view in your browser.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


TODAY’S S&P 500 SET-UP – May 10th, 2012


As we look at today’s set up for the S&P 500, the range is 21 points or -0.63% downside to 1346 and 0.92% upside to 1367.













  • ADVANCE/DECLINE LINE: on 5/09 NYSE -1080
    • Down from the prior day’s trading of -613
  • VOLUME: on 5/09 NYSE 940.15
    • Increase versus prior day’s trading of 4.2%
  • VIX:  as of 5/09 was at 20.08
    • Increase versus most recent day’s trading of 5.4%
    • Year-to-date decrease of -14.2%
  • SPX PUT/CALL RATIO: as of 05/08 closed at 2.03
    • Up from the day prior at 1.31 



  • TED SPREAD: as of this morning 38.05
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.89
    • Decrease from prior day’s trading at 1.82
  • YIELD CURVE: as of this morning 1.65
    • Down from prior day’s trading of 2.03


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Bank of England MPC rate decision, asset purchase target
  • 8:30am: Import Price Index, Apr., est. -0.2% (prior 1.3)
  • 8:30am: Trade Deficit, Mar., est. -$50.0b (prior -$46.0b)
  • 8:30am: Initial Jobless Claims, week of May 5 (prior 365k)
  • 8:30am: WASDE corn, cotton, soybean, wheat
  • 9:30am: Fed’s Bernanke speaks on bank capital in Chicago
  • 9:45am: Bloomberg Consumer Comfort, wk of May 6 (prior -37.6)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas storage change
  • 11am: Fed to sell $8b-$8.75b note, 10/15/13 to 1/31/14 range
  • 1pm: U.S. to sell $16b 30-yr bonds
  • 1:20pm: Fed’s Kocherlakota speaks in Minneapolis
  • 2pm: Monthly Budget Stmnt, Apr., est. $30.5b (prior -$40.4b)



  • Bank of England expected to halt bond purchases at GBP325b
  • Cisco forecast 4Q revenue, profit growth that missed ests.
  • Euro diminished in poll showing more than 50% predicting an exit
  • Intel hosts investor day; watch commments on capex, gross margin: Stifel
  • Hong Kong Exchanges said to submit takeover bid for London Metals Exchange
  • Spain takes over Bankia after chairman says he will step down
  • ArcelorMittal beats estimates on U.S. steel-demand recovery
  • Sony profit forecast misses estimates as TV sales decline
  • Australia’s jobless rate falls to 1-year low, currency rises
  • Yanzhou Coal among cos. in talks to buy Vale SA’s stake in an Australian coal mine for more than A$500m, people familiar said
  • U.K. March manufacturing increases more-than-forecast 0.9%
  • Japan posts current-account surplus for a second month
  • Bernanke gets 75% approval rating in Bloomberg global poll
  • Las Vegas, Atlantic City casino monthly figures may be released



  • Big Lots (BIG) raised to overweight at Barclays Capital
  • General Growth (GGP) raised to buy vs neutral at UBS
  • Highwoods Properties (HIW) cut to hold vs buy at Jefferies
  • JDS Uniphase (JDSU) raised to buy vs neutral at UBS
  • Macerich (MAC) cut to neutral vs buy at UBS
  • Tanger Factory (SKT) raised to buy vs neutral at UBS
  • Tesoro (TSO) raised to buy at BofA
  • Tetra Tech (TTI) rated new at Roth, PT $35
  • Vail Resorts (MTN) cut to market perform at Wells Fargo
  • Vertex Pharmaceuticals (VRTX) cut to outperform at RBC Capital
  • Vulcan Materials (VMC) raised to outperform at RBC Capital




  • Oil Snaps Longest Decline Since 2010 as U.S. Jobless Claims Fall
  • Copper Rises as Chinese Trade Figures Spur Stimulus Speculation
  • U.S. Soy Reserves May Fall 31% Before 2013 Harvest, USDA Says       
  • Brazil’s $2 Billion Sugar-Cane Revival Plan Fails: Commodities
  • U.S. Corn Reserves May Double on Record Crops, USDA Says
  • Soybeans Climb on Stockpile Speculation; Corn, Wheat Advance
  • Gold Declines for Fourth Day in New York as Dollar Strengthens
  • Cocoa Falls as Rain May Help Crop in Ivory Coast; Coffee Gains
  • Cotton Drops After Government Report Shows Bigger U.S. Harvest
  • Aluminum Buyers in Japan to Pay Record Fee as Supply Drops
  • Cosan’s $2.4 Billion Acquisition Spree Hurts Debt: Brazil Credit
  • London Oil Trades Beat New York for First Time: Chart of the Day
  • Cooking-Oil Imports by India Seen Advancing for Third Month
  • Florida Orange-Crop Estimate Little Changed, USDA Report Says
  • Arch Coal Lures Lenders With Coal in Ground: Corporate Finance
  • U.S. 2013 Wheat Stockpiles Seen Falling on Increased Exports
  • U.S. Cotton Crop Will Climb 9.2% as Harvested Area Expands

THE HEDGEYE DAILY OUTLOOK - daily commodity view





US DOLLAR – forget Greece, get the US Dollar right and you’ll get a lot of other things right. US Dollar index up for 6 consecutive days and US Stocks down for 6 consecutive days – the USD Correlation Risk is screaming at -0.90 USD vs SPX right now and that’s why Gold and Oil refuse to bounce too. Correlation Risk isn’t perpetual, but when in the soup, it matters.







FRANCE – so you’re saying socialism is a ‘buy on the news’, eh? Non, non, mes amis – France flashing another negative divergence this morning, leading losers in Europe at -0.6%, taking the CAC’s draw-down from the March top (when European and US Growth Slowing accelerated on the downside0 to -14%.







CHINA – trade balance out last night just tells us more about what we already know – Growth Slowing in Asia marked the highs for both the Hang Seng and the Sensex all the way back in February. This is not new and it’s primarily why China continues to act pretty well on bad economic “news” (+0.1% overnight and +10% for 2012 YTD – my favorite Global Equity market).










The Hedgeye Macro Team

Howard Penney

Managing Director





KSS: Reactive


It’s about time. KSS is finally taking steps to adjust its pricing strategy a full quarter after JCP implemented its new EDLP approach in February. We’re rarely (if ever) a fan of reactive strategies and this one is no different. KSS will now be more aggressively fighting for share – that’s great, but others have already been taking it for the last 3-months now such as Macy’s, the off-pricers (TJX/ROST), etc. Increased competition in the mid-tier that will ultimately drive increased margin pressure is here and officially heating up. This isn’t good for KSS, or the companies that rely heavily on this channel for distribution such as CRI, HBI, GIL to name a few.

That said, KSS posted a very low quality SG&A driven beat for the quarter with both revenues and gross margins coming in soft. A few points of note here:

  1. Revenues were light. We knew that last Thursday and now KSS is going to try to drive traffic with lower pricing. This didn’t work out so well for JCP. We expect an uphill battle ahead for KSS as well. Not good.
  2. Gross margins also came in below expectations. While some portion of this degradation was due to the new pricing initiative, KSS’ sales/inventory spread is virtually unchanged and still among the worst in the mid-tier. That’s very gross margin bearish over the intermediate-term.
  3. SG&A was the saving grace in the quarter coming in $66mm lower yy. We’d prefer to see KSS invest in remodeling some of its tired store base rather than pulling this lever so heavily to make EPS. It may indeed help manage earnings near-term, but that’s no good for F13 earnings growth sustainability.

All in, KSS is guiding Q2 down, but maintaining full-year expectations implying a more bullish view on 2H results. A strategy change of this magnitude is hardly a 1-qtr transformation – just ask Ron Johnson. This not only takes up the risk embedded in management’s guidance substantially, but it also increases the mid-tier competitive environment.

Here are a few more details regarding Q1 results:

Pricing: the newly implemented lower price strategy resulted in gross margins -220bps vs. guidance of -160E & the street -151E.


Opex: KSS beat this morning on a ~$70mm reduction in SG&A spend to offset comps coming in light (+0.2% vs +1E).


Core Contracting: E-commerce sales were not given in the press release, but if we assume 10% growth in 1Q12 (on 40% growth in FY2011), new store sales suggest the core business contracted -0.2%.


Guidance: 2Q guidance per the press release is $0.09-$0.17 below consensus at $0.96-$1.02 vs. $1.13E driven by sales +2%-3% vs. +3.1E and comps flat to +1% vs. +1.2E. The delta seems to be primarily attributable to lower
priced sales driving the top line. The street is looking for Q2 Gross Margins to be -94bps- they may come in closer to -150bps. For the full year, KSS reiterated EPS of $4.75 vs. $4.74E suggesting some back half improvement
relative to expectations. Guidance suggests 2H earnings of $3.10-$3.16 vs. $3.03E which seems to be driven by better positioning for back to school and the lower pricing.


Inventories: Inventories were +7% in 1Q12 vs. +5% in 4Q11. As a result of first quarter revenues +2% vs. slightly negative in 4Q11, the sales/inventory spread improved 1 pt sequentially though remains -5%.


KSS: Reactive  - KSS SIGMA


Casey Flavin



Matt Darula




Loss of Confidence

This note was originally published at 8am on April 26, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The failure of the Knickerbocker Trust was just the beginning of a more general loss of confidence.”

-Jim Rickards


Anyone who has been in this business for more than the last 5 years knows what the biggest problem is for the US stock market – confidence. The People do not trust the financial system and all of its central planning puppetry. Therefore, The People are not giving the asset management community the number one thing they want – fund flows.


No Confidence. No Flows. No Volume.


That’s not new this morning. Neither is the world’s reaction to the US Federal Reserve’s un-elected Central Planner in Chief’s Policy to debauch the US Dollar in a repeated, but fleeting, attempt to inflate stock and commodity prices.


Sure, the price of Oil and Gold are up on the Dollar Down move. But they are up less than they were on Bernanke’s moves to Qe1, Qe2, and Qe3 (Bernanke’s latest war on the American Consumer (and Saver), pushing 0% interest rates on fixed income savings accounts to 2014 was a hybrid Qe3). We don’t think he has an iQe4 upgrade in his bailout bag during the General Election debate.


The reason why I used another one of Jim Rickards’ quotes (page 49 of Currency Wars) this morning is that it’s a critical one to consider in terms of why the US Federal Reserve Act of 1913 was established in the first place.


I’ll let you read Rickards book to form your own opinion on this, but the upshot of the problem was that NYC bankers, traders, etc. have always had the same problem – at a point, they take on too much risk with other people’s money, and they blow up.


In any other business, you’d be accountable for those losses and your business would go away. Post the 1907 Crisis, when banks like Knickerbocker literally blew up, banking and capital markets related companies have worked very hard at making sure that they have an un-elected man at the Fed that they can both appoint and politicize for their own compensation purposes.


The Fed was created to bailout banks, not American consumers.


Back to the Global Macro Grind


While it’s both shocking and sad (but expected), Ben Bernanke was able to get through an entire press conference yesterday without mentioning the words “US DOLLAR.”  What might be an even more glaring national embarrassment was that not 1 American journalist asked him about it either.


For those of us who aren’t paid to be willfully blind, here’s how real-time market expectations work:

  1. The Fed’s Monetary Policy drives the direction of the US Dollar
  2. The US Dollar, since it’s the world’s reserve currency, drives real Dollar adjusted expectations in liquid asset prices
  3. The inflation or deflation of asset prices (commodities in particular) drives the slope of Global Consumption Growth

I have my B.A. in Keynesian Economics from Yale. I don’t need a Ph.d in that dogma to explain to me how obvious the relationship is between the US Dollar and its purchasing power. Try it with your own money at home – you’ll get the point.


Despite Spain crashing again (Spanish stocks down -22% since February), even the Euro is strong versus the US Dollar this morning. The #1 Most Read Headline on Bloomberg: “Bernanke Prepared To Do More.” And the US Dollar Index is down for the 6th out of the last 7 weeks.


Our models show that Global Consumption Growth has never NOT slowed with oil above $96/barrel. Pick your vintage, Brent or WTIC, last I checked nothing happened in Iran overnight either. Prices of $104 and $119 per barrel, respectively, don’t lie; politicians do.


Does money printing matter? Does the amount of Dollars (World Reserve Currency) matter relative to World Oil Reserves? Of course they do. In 1990 the ratio of US Money Supply (M3)/Proved Oil Reserves = 4.1x. Today, that ratio = 10.7x. Reversing this factor alone would get you $75-80 oil, and the 99% would love that.


Got 1990s? Look at our Chart of The Day, then pull up a long-term chart of Oil – and you’ll see what I mean by Loss of Confidence:

  1. US Consumer Confidence tracked between 80 and 140 during the 1990s (this week it hit 69.2 for April)
  2. US Dollar Index Averaged $92.93 during the 1993-1999 expansion (avg GDP was 3.84%, so demand did what to oil?)
  3. Average price per barrel of WTIC Oil during 1993-1999 expansion = $18.63/barrel (not a typo)

It’s the US Dollar Stupid. That’s what real people use when they buy gas at the pump. So, if you’re part of a Keynesian crack house in Washington that’s addicted to devaluing the credibility and currency of the American people, shame on you.


If you want to try the “counter factual”, get your conflicted and compromised Fed friends to raise interest rates on Sunday night and tell me how many call options on oil you want to buy in front of that.


If you want to tell me Oil is up because of Iran, show me something going on in Iran. If you want to tell me Oil is up because global demand is up, show me where growth isn’t slowing.


Show me something. But don’t show me another complete embarrassment like yesterday’s Fed Press Conference. The concept of “price stability” (Fed mandate) does include the currency in which prices are paid. The Loss of Confidence in this country is rightly placed.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1633-1655, $118.64-120.77, $78.97-79.44, and 1377-1394, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Loss of Confidence - Chart of the Day


Loss of Confidence - Virtual Portfolio

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