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FX War

“You can’t expect to have war all the time.”

-Winston Churchill

 

You can’t expect markets to keep going up or down all the time either. Especially in the middle of a Global Currency War, risk moves fast. So you have to keep moving out there. We call it managing the risk of the market’s range.

 

In addition to the aforementioned quote, in 1940, “Churchill told his War Cabinet that Roosevelt’s message came as near as possible to a declaration of war and probably as much as the President could do without Congress.” (The Last Lion, page 100)

 

After Paris fell to the Germans, that didn’t happen. Politically, Roosevelt wasn’t ready to commit. Militarily, America wasn’t yet ready either. Not unlike the FX War you are watching in markets today, timing and expectations matter. Ask the French.

 

Back to the Global Macro Grind

 

After being on the sidelines (relative to the US and Europe) since 2006, the Japanese are going to engage in the FX War, big time. That’s what Abe’s LDP party win promised, but the timing of Japan’s engagement doesn’t happen all at once.

 

The Bank of Japan (BOJ) told the market that it will expand its bailout fund (asset purchase fund) to 76 TRILLION Yens last night (that’s a lot of Yens). But, from a market expectations perspective, that wasn’t enough to keep the Yen down!

 

All the while, Japan’s economy continues to head deep into the cesspool of Keynesian policy promises. Japanese Exports (it’s an export economy) were reported at -4.1% year-over-year for November. That’s right, despite their recent successes setting their currency on fire, “cheaper exports” are not reacting to the FX War Policy To Inflate.

 

Sound familiar?

 

Of course it does. Charles de Gaulle tried it. Failed. The British tried it in the 1960s. Failed. Nixon/Carter tried it in the 1970s. Failed. Japan tried it in the 1990s. Failed. Now they are all trying it, at the same time, and it’s failing.

 

And I mean failing from an economic perspective. Any buffoon with a money printing machine can inflate his stock market if he devalues the currency that market is priced in. Chavez devalued. The Venezuelan stock market is +305% YTD.

 

If the Japanese start to double and triple down on the 76 TRILLION Yens, just when the US and Europe feels safe from theirs, Japan may very well end up being the next sovereign credit crisis in 2013.

 

Follow the bouncy ball:

  1. Japan Real Estate and Stock Market Bubble implodes. Print “lots of money”, economy fails, stocks rally, fail, rally, fail.
  2. USA Real Estate and Stock Market Bubble implodes. Print “lots of money”, stocks rip, economy doesn’t; rally, fail.
  3. European Real Estate and Stock Market Bubble implodes. Print “lots of money”, yep – need to do more of that, rally!

This gargantuan experiment of Keynesian academic dogma (Bernanke calls it “innovation”) started with America advising Japan to “PRINT LOTS OF MONEY” in 1997 (Paul Krugman). So why can’t a lie that cannot live end where it started?

 

Every risk management exercise should start with a simple question that doesn’t have an answer (yet).

 

Back to our current positioning:

  1. Long US Consumption Stocks (bought Consumer Staples, XLP, on red yesterday)
  2. Short Commodities (re-shorted Oil yesterday on green)
  3. Out of the way on Fixed Income (cut our asset allocation to 0% last week)

Now maybe buying anything that’s been propped up by Policies To Inflate doesn’t make sense. Once every asset class that hasn’t been locked down (stocks, bonds, commodities) has been artificially inflated, isn’t the only risk that remains deflation?

 

Probably not. That’s the whole point about the FX War – you can’t have deflation all of the time. Ask the government.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $105.95-110.02, 3.57-3.62, $79.15-79.91, $1.31-1.33, 1.73-1.85%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

FX War - Chart of the Day

 

FX War - Virtual Portfolio


THE M3: HOTEL WAGES

The Macau Metro Monitor, December 20, 2012

 

 

HOTEL EMPLOYEES EYEING 6% PAY RISE AS OCCUPANCY RATE GROWS Macau Daily Times

Hotel employees are asking for at least a 6% salary increase next year as visitor numbers grow and are staying longer on average, according to Lei Pou Loi, president of the Macao Hotel Employees Association, who said hotel guests stay as long as 1.9 nights comparing to just 1.4 nights by overall visitors.  Asked of the possibility of a double-digit hike, Lei said that although they hope for the best, such scale is most unlikely, given the fact that cheaper foreign laborers are readily available in the market.

 

 



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,

KM

 

Keith R. McCullough
Chief Executive Officer

 

History Matters - Chart of the Day

 

History Matters - Virtual Portfolio


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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


HEDGEYE RISK MANAGEMENT
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


HEDGEYE RISK MANAGEMENT
120 Wooster St.

New York, NY 10012


 

 



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