“Free-Market capitalism offers the most efficient and just way to order an economy.”
-George W. Bush
While it’s a shame that when short-term politics met economic gravity that neither Bush nor Obama gave anything other than lip service to one of America’s greatest economic ideals, that doesn’t mean all is yet lost. Arresting the un-American trend of centrally planned markets may very well be our greatest opportunity.
While I’ve had some big market calls wrong in the last month, I haven’t been wrong on the fundamental realities born out of Big Government Interventions. First, Policies To Inflate slow growth. Then they slow corporate earnings. Bernanke Bailout Bulls can blame Europe for yesterday’s decline, or they can pull up a chart of Caterpillar (CAT). Markets don’t lie; politicians do.
To give the aforementioned quote the appropriate context, it comes from a book I’ll be critically reviewing in the coming weeks: The 4% Solution. Bush wrote the Foreword and admirably prefaced his comment about American Liberty by holding himself accountable. He admits that “market-distorting government policies” played a big part in the 2008 crisis. God help our children if we can’t learn from that.
Back to the Global Macro Grind…
At the top of the market’s performance chasing squeeze (September 14th), we didn’t hide from our Q2 2012 Macro Theme, The Last War: Fed Fighting. We dug in our heels and stayed true to our process. Commodity inflation is not economic growth. It slows growth.
Headline this morning from Bloomberg: “Fed’s Plosser Says QE3 Risks Fed Credibility, Won’t Boost Jobs”
I’ll get to why I started covering shorts and buying stocks more aggressively yesterday in a moment, but first let’s rewind the tapes on what just happened after Bernanke pinned market prices at their YTD highs on no-volume:
- US stocks are down for 6 of the last 7 days (down -2.2% from the intraday high of 1474 Friday September 14th)
- CRB Commodities Index has lost -4.3% of its value in a straight line; Oil snapped TAIL risk support of $111.44 (Brent)
- US Treasury Bonds (10yr yield) just ripped a +13% move (yields down from 1.9% to 1.65% this morning)
I think Bernanke calls this something like “price stability.”
To their credit, a Perma-Bull might say, “a 2.2% correction is nothing.” Agreed. It’s only something if you bought the 1474 SP500 top in the Big Beta Sectors, with leverage. Underneath the beta-chasing hood, here’s what’s happened from the September 14th high:
- Financials (XLF) = down -4.2%
- Basic Materials (XLB) = down -4.2%
- Energy (XLE) = down -4.0%
While bulls sounded more like crickets into yesterday’s close, I can assure you that buying high and selling low, if done repeatedly for no other reason than chasing a benchmark, will leave a short-term performance mark.
What did we do? It’s all #timestamped, so you don’t have to take my word for it, but I’m encouraged that I didn’t meet my pre-September 14th mistakes with more mistakes-upon-mistakes. During the 1.5 week correction we sucked +1.71% of alpha out of the long side of Utilities (XLU) and, instead of buying a US Index into yesterday’s oversold close, we bought Apple.
Bought APPL? Yep. Not my 1st rodeo riding beta – it’s all about managing the risk of the immediate-term range. In a world where both Growth and #EarningsSlowing are going to dominate fundamental news-flow, I think investors will buck up for the growth that they can find.
Under the current US central planning regime of Obama, Bernanke, and Geithner, I think there’s a better chance of my becoming an adjunct professor of charlatan Economics at Yale than the USA seeing a 4% GDP print anytime soon. That’s what makes growth stocks attractive when A) you can find them, and B) they are on sale.
To review our Real-Time Positions, we have 10 LONGS and 6 SHORTS. On the long side, the best long-term Growth Ideas are:
- Las Vegas Sands (LVS)
- Apple (AAPL)
- Paccar (PCAR)
- Starbucks (SBUX)
- Under Armour (UA)
- Urban Outfitters (URBN)
- Brinker (EAT)
We also bought Brazil (EWZ) on red yesterday. While the government is moving towards making up its inflation numbers like Japanese, US, and European governments do, Brazilian economic growth looks ready to slow at a slower-rate. On the margin, that’s better than bad.
Unlike in the USA, where the manic media is attempting to tell you that yesterday’s Consumer Confidence print of 70.3 for September is bullish (see Chart of The Day for the historical context of US confidence – it’s lower than where it was in the 1970s), Brazilian Consumer Confidence clocked a 122.1 for September! That’s the kind of confidence we need.
To Review: during the only 2 sustainable +4% US GDP Growth runs of the last 40 years:
- 1 (Reagan, Strong Dollar) = US Consumer Confidence tracked between 90-120
- 1 (Clinton, Strong Dollar) = US Consumer Confidence tracked between 100-140
In other words, USA is not Brazil. Today’s American Consumer Confidence (oscillating between 40-70 during Bush & Obama Dollar Debauchery Administrations) reflects, precisely, what the zeitgeist in America feels like. Brazil's confidence tracked between 95 and 120 from 2005 to 2010. That's the kind of confidence we need.
This is not the country I came to in the mid-1990s. This is not a “free-market” either. This needs to change, just like my positioning did.
My immediate-term risk ranges of support and resistance for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, AAPL, and the SP500 are now $1, $105.74-111.44, $79.15-80.59, $1.28-1.30, 1.63-1.72%, $671-693, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on September 12, 2012 for Hedgeye subscribers.
“History doesn’t repeat itself, but it does rhyme.”
Some prominent Western academic economists (Keynesians) tend to go with the “feel” thing on US and Global GDP growth. It “feels like 3-4%” is something that we’ve heard almost every year since 2006.
So how does it feel to you? To me, if I had to make a call on it, it definitely feels like it’s September. It feels like the sun probably rises in the East this morning too. On the year-to-date thing, I’m not sure if it feels like 1987, 2007, or 2008.
In September of all those years, something was different. In September 2007, growth slowed and companies started to miss. In September 2008, expectations ramped for a bigger and bigger Paulson bazooka bailout. And for those of you who remember what came after September 1987 (October 19th, down 23% in a day), it was just a blip, because stocks did close “up year-to-date.”
Back to the Global Macro Grind…
If you boil down all 3 of those periods, in terms of isolating central planning expectations, it’s tough to not feel anything that rhymes more than 2008. For Hank Paulson, TARP was supposed to be $250B, then $500B, then $800B (by October Paulson was bent over his garbage can). For Bernanke, 0% rates were supposed to run until 2012, then 2013, then on January 25th he had to move the goal posts to 2014.
Now what? Will Buzz Lightyear Bernanke go to 2015, then infinity, and beyond?
Apparently the Europeans will do “whatever it takes”, so why not? It’s only going to get us $130-150 Oil and an even faster Global Growth Slowdown than when Bernanke pushed Oil to $125 (Brent) in February.
Expectations matter. And these central planners will be held accountable for it this time – that’s not different. On that score, here are 3 top headlines (expectations) from Bloomberg.com this morning:
1. “Fed Seen Starting Qe3 While Extending Rate Pledge to 2015”
2. “Stimulus to Reverse Commodity Bull to Bear Fastest Since 2008”
3. “China’s Stocks Advance After Premier Wen Signals Stimulus”
Isn’t this centrally planned market thing exciting! If I’ve written this 100s of times this year, I may as well have written it 1000s and then walked right up close to you in March and yelled it in your ear with a government manufactured mega-phone:
POLICIES TO INFLATE SLOW GROWTH
Whatever the Europeans promised this morning might matter to where the last bottom-up turned macro hedgie capitulates on his European shorts, but it will not change the only thing that will change any of this – economic growth.
Across the board, August inflation data in Europe was as follows:
- France CPI +2.4% (vs 2.2% in JUL)
- German CPI +2.2% (vs 1.9% in JUL)
- Spain CPI +2.7% (vs 2.7% in JUL)
Now, remember, the Spanish government just admitted to making up their GDP growth numbers for the last few years, so don’t think for a New York day traded minute that they aren’t suppressing real-life inflation on a reported basis like Bernanke does.
What you have now in Europe is called stagflation (growth slows to flat/negative year-over-year while inflation accelerates sequentially month-over-month). Anyone who tells you $116 oil, $7 corn, and $60,000/yr to go to Yale is “deflationary” needs their head read.
To review the core components of our Global Macro Model and why we have had Growth right in 2012:
- Growth is either slowing or rising, sequentially (quarter over quarter)
- Inflation is either slowing or rising, sequentially (month-over-month)
- Policies to Inflate expectations are either rising or falling which, in turn, perpetuates 1 and 2
If you need to know why people who didn’t blow up in 2008 keep flowing out of Equity Funds intuitively get this, look no further than the broken sources perpetuating policy expectations: forecasters at the US Federal Reserve.
In our Chart of The Day, you can see team Bernanke’s forecasting track record on US GDP:
- Pre having to do QE2 at 2010’s low (he thought QE1 was the elixir for growth), he was certain US Growth was going to be 4%
- Post being wrong on what QE2 would do for US employment and economic growth, he kept dropping his estimates
- Currently, he’s been wrong on what QE3 (the January 25th push of 0% to 2014) would do for US Growth by a lot
So, is Ben Bernanke a credible source? Are his academic cronies? Does he have any business perpetuating policy expectations that are built on his forecasted expectations? Or is he just doing more and more of what has not worked, hoping he gets something right?
I don’t know the answer to that last question. But it certainly rhymes with how a lot of bad managers, coaches, and players approach playing at the highest level too. Maybe this time is different, but for those guys it never ends well either.
My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, US Treasury 10yr Yield, Russell2000 and the SP500 are now $1699-1756, $113.92-116.48, $79.74-80.97, $1.26-1.29, 1.68-1.74%, 827-846, and 1419-1445, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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TODAY’S S&P 500 SET-UP – September 26, 2012
As we look at today’s set up for the S&P 500, the range is 28 points or -0.80% downside to 1430 and 1.14% upside to 1458.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: on 09/25 NYSE -1409
- Decrease versus the prior day’s trading of -586
- VOLUME: on 09/25 NYSE 755.74
- Increase versus prior day’s trading of 20.81%
- VIX: as of 09/25 was at 15.43
- Increase versus most recent day’s trading of 9.05%
- Year-to-date decrease of -34.06%
- SPX PUT/CALL RATIO: as of 09/25 closed at 1.74
- Down from the day prior at 2.59
CREDIT/ECONOMIC MARKET LOOK:
BERNANKE – every Qe has been met w/ a shorter, steeper, asset price rally, but a faster correction; this is doing nothing to inspire price stability and employment; Financials (XLF) and Commodities (CRB) down -4.2% and -4.3%, respectively, since what will be remembered as a historic morning-after in US economic history (SEP 14, 2012).
- TED SPREAD: as of this morning 25.70
- 3-MONTH T-BILL YIELD: as of this morning 0.11%
- 10-Year: as of this morning 1.66%
- Decrease from prior day’s trading of 1.67%
- YIELD CURVE: as of this morning 1.39
- Down from prior day’s trading at 1.41
MACRO DATA POINTS (Bloomberg Estimates)
- 7am: MBA Mortgage Applications, week of Sept. 21 (prior -0.2%)
- 10am: New Home Sales, Aug. est. 380k (prior 372k)
- 10:30am: DoE Oil, Gasoline Inventories
- 11am: Fed to purchase $4.25b-$5b notes due 9/30/2018-8/15/2020
- 11am: Business Roundtable releases 3Q CEO economy survey
- 1pm: U.S. to sell $35b 5-year notes
- 1:15pm: Fed’s Evans speaks in Hammond, Indiana
- Secretary of State Hillary Clinton delivers remarks at UN on HIV/AIDS, 9am
- TeleCommunication Systems, Northrop Grumman, Lockheed Martin officials unveil new user terminal for secure military satellite communications, 8:30am
WHAT TO WATCH:
- Spanish government bonds fall amid bailout speculation
- Kraft Foods Group to replace Alpha Natural in S&P 500
- Intel CEO said to tell staff that Microsoft’s Windows 8 operating system is being released before fully ready
- Yahoo says Ken Goldman to replace Tim Morse as finance chief
- Credit Suisse said to consider merging asset management unit
- EADS CEO struggles to quell German skepticism on BAE merger
- Ameriprise said to near purchase of ING asset management unit
- Bank of America said to plan about 40 job cuts in Asia
- IBM’s Rometty to succeed former CEO Palmisano as chairman
- GE raises $462m from selling 7.6% stake of Bank of Ayudhya
- Barclays unit sued over securities by U.S. Credit Union regulator
- Cargill says looking for acquisitions to meet target growth
- AGF Management (AGF/B CN) 8am, C$0.19
- Progress Software (PRGS) 4:30pm, $0.23
- HB Fuller (FUL) After-mkt, $0.53
- Worthington (WOR) After-mkt, $0.47
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Oil Falls to Seven-Week Low on Demand Outlook, Stockpile Gain
- Billionaire Rinehart Sued for Ownership of Pilbara Ore Mines
- Sugar to Extend Bearish Run in Third Year of Glut, ISO Says
- Copper Drops on Concern Global Stimulus May Fail to Spur Growth
- Gold Gains in London on Signs of Demand in Euros, Indian Rupees
- Soybeans Drop on Brazilian Conditions, U.S. Harvest Progress
- Iron Ore Unlikely to Rebound as China Slows, Shale-Inland Says
- Rebar Falls in Shanghai on Concern Housing Curbs May Sap Demand
- Palm Oil Set for Biggest Quarterly Loss Since 2008 on Stockpiles
- AngloGold Operations Halted in South Africa as Strikes Spread
- Natural Gas Pipelines to Expand U.S. Supply Glut: Energy Markets
- China Coal Inventory Drop Suggests Destocking End Is Nigh
- Paraguay Reclaiming Energy From Brazil in Franco Industrial Push
- Cargill Says Grain Rally Means No Shortage
- U.K. Farms Face Organic Wheat Seed Shortage as Rain Spurs Blight
USD – get the Dollar right, you’ll get most things beta right; that’s the story of the last 7 trading sessions (stocks down for 6 of 7 with the USD straight up on the bounce off its TAIL support line of $78.11). Right here the USD is immediate-term TRADE overbought; Euro 1.28 immediate-term TRADE oversold, so we bought stocks into the close yesterday, including AAPL.
JAPAN – the BOJ has plenty of experience to show into Krugman, Bernanke, and the Princeton School of Keynesian Fiscal Cliffs; remember Japan’s additional 10 TRILLION Yens in “stimulation” last wk? never mind a 1.5 day rip like Bernanke had, Japan only had 1 day – expensive!; Nikkei down another 2% last night, down -13.2% since #GrowthSlowing started, globally, in March.
The Hedgeye Macro Team
The Macau Metro Monitor, September 26, 2012
INVESTORS STEP UP INVESTMENT IN STUDIO CITY Macau Business
MPEL said it has reached an agreement with its partners in the Studio City project to invest an additional US$350 million (MOP2.8 billion) total in equity capital toward the venture. An option in the agreement allows Melco Crown’s partners six months to deliver their 40% share of the US$350 million. If not, the gaming operator will increase its stake in Studio City to 67% from 60% by investing the full US$350 million amount itself, Melco Crown said.
ANGELA LEONG TO RUN FOR NEXT AL: CASINOS YET TO INTRODUCE CONCRETE MEASURES FOR SMOKING BAN Macau Daily Times
SJM CEO Ambrose So told the media that operators are yet to come up with concrete measures to comply with the new smoking ban law. The reason for the lack of measures was that the government did not consult the industry earlier, so that operators did not have enough time to make the necessary preparations. While stressing that they supported the smoking ban, So also pointed out that the gaming industry is “special”, and the government should consider how to better enforce the ban inside gaming venues.
Angela Leong, Managing Director of SJM, said she expected the competition in the gaming industry to become more intense as more neighboring countries and regions joined the business, but she was confident that SJM would continue to play a leading role as its new project in Cotai is expected to give the company an additional competitive edge. Leong also confirmed to the media that she has opted to run again in the Legislative Assembly (AL) election scheduled for next year.
NO WAGE RISES EXPECTED FOR GAMING Macau Business
SJM CEO Ambrose So says he does not see a significant increase in salaries for staff in the gaming industry taking place in the coming years. Average monthly earnings for employees in the gaming industry increased 22% from MOP14,491 (US$1,811) in June 2007 to MOP17,740 in June this year, according to government statistics.
PUBLIC WORKERS GET EXTRA DAY OFF ON GOLDEN WEEK Macau Business
The government today announced it would give public workers a special grant for exemption from work on October 3. That means public workers will have a five-day break during the National Day Golden Week. The leave period starts on Saturday (September 29) and continues until Wednesday (October 3).
Takeaway: $SPLS The risk is severe in this 'change everything' move. 8x EPS may look great, but not if the real multiple is 30x.
SPLS used 10,155 characters in its mammoth press release. It would have been easier to simply say, ‘we’re changing everything’ and top out at 25. The risk embedded in this model is severe.
Struggling retailers are like people with severe obesity – it takes them a long time to get so ill. SPLS is now officially obese with its press release surrounding how it is going to change the company, but we’re astonished with how quickly it got there. After all, SPLS has already been known as having one of the best management teams in retail. Heck, I even sourced analytical talent on my own team from SPLS, and yes, I can say that there are a lot of very smart people there.
But those classic rock faithful (and no to our interns, Nirvana is not Classic Rock) will know that Keith Moon, drummer from ‘The Who’ told Jimmy Paige that his new band will go over like a Led Zeppelin. That’s what SPLS smells like here. But without the success of selling 200 million albums thereafter…
Think about it…when you put great people in a terrible industry – not only mass big box retail – but big box office supplies retail where they have two bleeding competitors in Office Max and Office Depot and compete with everyone from Wal Mart to Radio Shack, to Best Buy to Ikea, then the job will win 9 times out of 10 and the ‘great person’ will walk away a winner only 10% of the time. Not good odds.
Let’s look at what this company is trying to do
- integrate its retail and online offering,
- increase investment in its online businesses,
- reorganize its operations,
- implement senior leadership changes,
- initiate a multi-year cost savings plan, and
- restructure its International Operations
Let me just say that any ONE of these is an undertaking that is so incredibly risky. But to do all six simultaneously? There is absolutely no shot of this working out – at least not without some more severe pain before they see relief. There are two things that bother us the most.
- That they think they can do this while cutting costs. Mark our words, there has never been a retailer that has made changes like this to ‘accelerate growth’ while cutting costs and has had the strategy work. One of them is trying now. It rhymes with KC Blenney. And no, I’m not saying that to be sensationalistic. This could be another JCP. It’s business is actually less defendable than JCP’s is. The problem at JCP is that the model is so expensive. But the idea is a good one. Here, I’m not even sure what the idea value proposition is.
- We should have seen this, at least in part. When looking at the company’s percent of sales coming from on-line, 31% sales growth came from on-line in the four years ending calendar 2009. Despite the added boost from acquiring Corporate Express in 2008, the contribution of on-line to total growth slowed from an average of 8% per year over four years to only 2% in each of the last two topping out at 42% of sales vs. 40% 3-years prior and 27% 6-yrs ago. The company simply stopped spending on its fastest growing business. Hate to break it to them, but spending again now means they possibly benefit in 2 years. Not today.
- In the interim, these reorg costs will be steep, and very dynamic. All competitors will be salivating over this.
The stock looks so cheap. But valuation need not apply. They own less than 3% of their stores, and have little else to monetize a breakup value. Maybe an Ackman-type steps in and makes noise, but the company is already making a ton of noise on their own. You can hardly argue complacency to any sane Board member or sympathetic activist. But doesn’t 8x earnings look great? Not if the real multiple is 30x. Maybe they should move to Plano.
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