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History Matters

This note was originally published at 8am on December 06, 2012 for Hedgeye subscribers.

“Few soldiers knew the history, and most didn’t give a damn.”

-Michael Sallah


Sound familiar? History matters. And that doesn’t just hold for the Geneva Conventions (1949). It holds for the Constitutional and economic history of the United States of America too. We shouldn’t give a hall pass to the willfully blind.


The aforementioned quote comes from a chilling book that I am reading right now about Vietnam: Tiger Force - A True Story Of Men and War, by Michael Sallah and Mitch Weiss. It won the Pulitzer Prize in 2004 and is a glaring example of how groupthink can dominate decision making by men abusing authority.


When it comes to the big rules in life, most of us follow them. Some don’t. But when we catch them, they pay the price. What is the free-market price we are willing to pay the #PoliticalClass in this country? Giving up our children’s liberties violates the US Constitution. It may not matter in the moment. But I am guessing that if we keep this up, it eventually will.


Back to the Global Macro Grind


After the market close yesterday Timmy Geithner proclaimed his mystery of faith that “we’ll fall off the cliff if taxes don’t rise.” Really? Is that a threat? Or is he abusing his political power to do more of what many men and women before him have? Fear monger.


Geithner is one of the more unique authorities of the US #PoliticalClass because he has spent 54% of his born life working for the US government. That’s a long time – and boy has he raised a lot of debt and government spending along the way.


As a reminder, this generational (and Constitutional) debate in America isn’t just about raising the #PoliticalClass’ “revenues”:

  1. It’s about DEBT (raising the Debt Ceiling requires Congressional approval – yes, that’s a rule)
  2. It’s about SPENDING (real US government spending just ripped at an annualized rate of +9.5% in the last 3 months)
  3. And, of course, it’s about TAXES (Geithner calls them revenues because that’s how he gets paid)

Marxists wanted this – so now they have it. This is class war. The #PoliticalClass vs. The Rest of Us.


And if Geithner wants to try to scare the hell out of us threatening to “go off the cliff”, he can go ahead and try – but I for one am not scared of this man. If he was “deeply” worried about this, why in God’s good name was he ramping Government Spending (for the 1st time in 5 quarters) in the last 3 months? Why did he and Obama cheer Bernanke on, printing money and monetizing more US Debt?


Sadly, we all know the answers to these questions.


In other central planning news, Citigroup (C) pulled the ole bait and switch on Geithner and Co. and decided to fire 11,000 people yesterday. If you didn’t know how crony socialism works, here’s the deal: Geithner bails out his boys with your tax dollars, they grease each-other politically saying that they “saved” jobs, then fire everyone so that they can keep getting paid.


The Financials (XLF) liked that yesterday. Meanwhile Apple (AAPL) was collapsing (you only need to be up +30% from here to get back to September’s price to break-even). Now that growth and earnings have slowed, maybe that’s the new bull case – firing people.


What’s a better bull case?


From a US Economic Growth perspective, the only bull case that I can see as sustainable remains Strong Dollar, Down Commodities. Bernanke’s Bubbles (Commodities) are popping, and that’s potentially a very good thing for both US and Global Consumers if Obama just tells Bernanke to get out of the way.


What are the odds of that happening? Low.


Morgan Stanley (MS) is out with a version of the call Goldman (GS) made yesterday (Bloomberg: “Morgan Stanley Backs Gold, Corn, and Beans as Best Picks for 2013”). I smiled when I read that. Our call remains the exact opposite – has been since March 2012.


Despite Goldman pleading that the commodities “super cycle isn’t ending”, it’s pretty clear to us that it has already ended. Whether it’s Freeport McMoran (FCX) or the Gold Miners (GDX) getting blasted yesterday, it’s all one and the same thing to us – over-owned.


The other side of commodities (and their related equity “plays”) melting down since The Bernanke Top (SEP 2012) is of course buying consumption oriented exposures.


That’s why we bought US Housing (ITB) on red yesterday, and reiterate our favorite big cap Consumer long ideas: Starbucks (SBUX), Nike (NKE), and Yum Brands (YUM) this morning.


Our Financials and Housing Sector Head, Josh Steiner, will be hosting a housing call tomorrow at 11AM EST titled: "Could Housing's Recovery Go Parabolic in 2013?" If you’d like access to the call, please ping Sales@Hedgeye.com.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1684-1711, $108.61-110.05, $3.54-3.68, $79.61-80.19, $1.29-1.31, 1.58-1.66%, and 1404-1419, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


History Matters - Chart of the Day


History Matters - Virtual Portfolio

PCAR: Key Part of Our Thesis Playing Out As NAV Loses Class 8 Share

Takeaway: $NAV has lost significant market share in 2012. $PCAR is well positioned to pick up share in its largest market

 PCAR: Key Part of Our Thesis Playing Out As NAV Loses Class 8 Share


  • Navistar Share Loss:  In our August Truck OEM Black Book, we suggested that Navistar was likely to lose significant market share following product quality and strategy challenges.  The share loss has been significant and continued last quarter.
  • Unclear Call Comments: Navistar management said “And while we have lost some share during the course of the year, overall our market share has been relatively consistent for the last two quarters and our position in each segment has not changed.” (Troy Clarke)  At least in the Class 8 market, this appears to be an optimistic reading, in our view.
  • PCAR Should Gain:  We expect PCAR to pick up a significant portion of Navistar’s lost market share.  The share gains represent a tremendous opportunity for PCAR in the Class 8 space.

PCAR: Key Part of Our Thesis Playing Out As NAV Loses Class 8 Share - nav


  • PCAR Best Way To Play NAV Woes:  Shorting Navistar is a risky trade, in our view, because of a potential buyout by Hino, VW, or other interested party.  
  • Full 2013 Benefit: Next year, PCAR should get a full year benefit of a higher market share, in our view.  We note that Mack struggled to regain any of its lost market share in the 1990s.  
  • PCAR Top Idea: Paccar is one of our top long ideas because of share gains, reduced pre-buy cyclicality and higher construction activity.  Please see our Truck OEM Black Book for additional information.





Jay Van Sciver, CFA

Managing Director

120 Wooster St.

New York, NY 10012


FDX: Inflection in Express Margins Visible

Takeaway: FDX Express may have passed the trough in margins, with improvements likely in FY 4Q/FY 2014. FedEx Ground & Freight performed well.


FDX:  Inflection in Express Margins Visible


  • Inflection in Express Margins:  Given the cost reductions that are already underway, such as a ~2% drop in FTE head count, FedEx Express is probably past the trough in margins on an adjusted basis.  While there is some uncertainty around FY 3Q Express margins, Alan Graf commented that “you'll see it in Q4” on the conference call. 

FDX:  Inflection in Express Margins Visible - fdx marg


  • Express Margin Matters:  FedEx’s competitors have operating margins that are roughly 5-7 points higher than FDX’s, by our estimates.  Structurally, FedEx Express should be able meet or exceed the competition, in our view.  The FedEx Express division has ~26 billion in revenue, giving margin expansion significant bottom line leverage.  While a multi-year project, the potential upside is significant.
  • Ground Gains Ground:  The margin at ground declined, partly due to Sandy, fuel surcharge lag, and capacity additions ahead of a very strong peak volume season.  Those should be temporary factors and underlying volume gains looked healthy.  We expect FedEx Ground to be a growth driver for FDX as the division wins share from UPS and benefits from growth in e-commerce. 
  • FedEx Freight:  We were surprised by the profit growth at FedEx Freight.  We have generally dismissed the potential of this business because of the challenging competitive dynamics in that market.  The results in 2Q suggest that the Freight division may be a more relevant factor than we had previously assumed.
  • Just Getting Started:  FedEx remains one of our top long ideas.  As FedEx Express implements its cost reduction plans and FedEx Ground continues to win share in a growing market, we see meaningful upside potential over the next year or two.  Our base case fair value range for the shares is $120-$150.  For additional information, please see our November 8th Express & Courier Services Black Book.



Jay Van Sciver, CFA

Managing Director

120 Wooster St.

New York, NY 10012



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

Rise Up: Athletic Footwear

With recent volatility in the athletic footwear retail names, this week’s athletic footwear sales came in better on the margin despite a third straight week of consecutive industry sales declines. Importantly, performance categories where Foot Locker (FL) and Finish Line (FINL) are over-indexed were up +7.4% on the week compared to the broader industry down -3.7% reflecting a sharp rebound from last week and a return to a HSD growth trajectory. Nike, Jordan and Under Armour all gained share this week. We remain positive on NKE and FL and cautious on UA near-term.


Rise Up: Athletic Footwear - footwear1


Rise Up: Athletic Footwear - footwear2

Housing: Living The Dream

Housing data over the past several weeks has been very strong, indicating a recovery in the sector that’s long overdue. However, recent housing starts data is relatively weak when compared with last month’s numbers. Overall housing starts for November fell 3.0% to 861k from an downwardly revised 888k in October. October was revised down by 6k from 894k; total housing starts are up 25.7% year-over-year.


Housing: Living The Dream - housing1


Housing: Living The Dream - housing2


Housing: Living The Dream - housing3