Getting Religion

This note was originally published at 8am on December 27, 2012 for Hedgeye subscribers.

“Affairs are easier of entrance than exit; and it is but common prudence to see our way out before we venture in.”



Yesterday morning I was in the Canadian ski town of Banff, Alberta and today I found myself in Park City, Utah.  Since this is my first trip to Park City, I must admit it is a very picturesque town.  In fact, the beauty here almost offsets the fact the beers and cocktails are all watered down.  Almost being the key word.  But enough beating around the bush, today I’m going to jump right into it.


Yesterday morning in the Early Look I noted that violating the debt ceiling was imminent.  Coincidentally or not, later in the day yesterday Treasury Secretary Geithner issued a press release stating that the statutory debt limit would be violated by December 31st but that the Treasury department could take extraordinary measures to extend the ceiling by an additional $200 billion.  In the press release, it was also noted that:


1.)    The extraordinary measures can create approximately $200B in headroom under the debt limit; and


2.)    Under normal circumstances, that amount of headroom would last approximately two months. However, given the significant uncertainty that now exists with regard to unresolved tax and spending policies for 2013, it is not possible to predict the effective duration of these measures.


To summarize: while there may be two more months of flexibility, the uncertain policy environment makes it difficult to project.  So, just as he is preparing to exit stage door left, Geithner sticks the markets with more uncertainty.  


Managing through the fiscal and monetary crises that is looming over the next couple of months would actually require some discipline and willpower.  Unfortunately, both of those attributes are currently in short supply in the hallowed halls of Congress.  Yesterday, I referenced the book “Willpower” by Roy Baumeister and John Tierney.  The authors actually provide some advice as to how to build willpower.  They write:


“Religious people are less likely than others to develop unhealthy habits, like getting drunk, engaging in risky sex, taking illicit drugs, and smoking cigarettes.  They’re more likely to wear seat belts, visit a dentist, and take vitamins … And they have better self-control, as McCullough and his colleague at the University of Miami, Brian Willoughby, recently concluded after analyzing hundreds of studies of religion and self control over eight decades.”


There you have it, a key way to build will power it to become religious.  Sadly absent a mass baptism, I think it is unlikely that Congress gets fiscal religion in the coming weeks.


Speaking of getting monetary religion, or lack thereof, probably the most noteworthy move in global macro markets over the last month has been the utter collapse of the Japanese Yen.  Shorting the Yen was actually our top Macro idea in our Best Ideas Call back on November 15th. The flip side of this trade has been an inflation of Japanese equities.  The Nikkei 225 is now up 9% for the month of December and 22% for 2012. On one hand, an inflating stock market benefits those that own Japanese equities, but the longer term issue is that this flagrant printing of money actually leads to a loss of confidence in the Japanese currency with the second derivative being a loss of confidence in Japanese government debt.


The more looming concern in Japan may actually be the yet to be implemented fiscal policy of the new administration.  As Darius Dale wrote yesterday in a macro note intraday:


“Abe and Aso will craft a “large-scale” supplementary budget for the FY12 year (likely > ¥10 trillion), as well as a FY13 federal budget. Regarding the latter, the previously-imposed ¥71 trillion spending cap for FY13 was recently disregarded by the LDP, suggesting Abe is poised to take public expenditures to new heights. In short, we think Japan’s pending fiscal and monetary POLICY mix risks igniting a backup in JGB yields that could threaten Japan’s fiscal sustainability, potentially triggering a European-style sovereign debt crisis.”


Now, clearly shorting Japanese government bonds has been called the “Widow Maker” trade for a reason.  The reason being it has been an utter failure of a trade, but Japanese yields and CDS are starting to back up as the Japanese appear to be on the verge of entering a new era of indulgent Keynesian policy. 


The truly scary fact about Japan is that almost 50% of the public budget is financed by debt issuance.  Further, almost a quarter of the annual budget is actually used for debt service.  Astoundingly this is occurring at a time when Japan’s weighted average cost of debt is as low as it has ever been.  Clearly, any sustained back up in rates would be catastrophic for a country that already has a debt-to-GDP of 229%.


In positive news, yesterday we had more confirmation of the emerging housing market recovery in the United States.  On a year-over-year basis, the Case-Shiller national home price index was up 4.3% in October, up from a 3.0% increase in September.  On one hand, this is no surprise since Case-Shiller reflects Corelogic data on a lag.  Regardless, as our Financials Sector Head Josh Steiner has been noting, the market, media and Main Street focus on Case-Shiller and the nature of the housing market recovery is that good news will feed on itself.


Could the housing recovering reach escape velocity in 2013? It is likely too early to tell, but our models continue to suggest home price recovery will come sooner than the consensus expects.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1634-1671, $108.95-111.58, $3.51-3.61, $79.06-79.92, $1.31-1.33, 1.70-1.85%, and 1412-1450, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Getting Religion - Chart of the Day


Getting Religion - Virtual Portfolio


Today we bought Och-Ziff Capital Management (OZM) at $9.29 a share at 3:42 PM EDT in our Real-Time Alerts. The stock remains one of our top long ideas in financials. We're buying it back ahead of the financials earnings season.



WASDE May Be Bullish for Corn Prices

Downside to Yields and Acreage in the US


Friday’s WASDE (World Agricultural Supply and Demand Estimates) maybe a positive catalyst for corn prices, albeit a short lived one.  The first report of the year tends to have some volatility associated with it.  It is a look in the rearview mirror, however, and the game is on when the new corn crop gets into the ground.

Current consensus looks for a slight increase in ending corn stocks (652 million metric tons, or MMT versus the December WASDE report of 647 MMT).  We think there may be some risk to that number as both harvested acres (87.7 million, December WASDE) and yield (122.3 bushels per acre, December WASDE) may have to come down, lowering the production number beyond the decline contemplated by consensus (consensus of 10,675 million bushels versus a December number of 10,725 million).  We don’t have a feel for any potential changes in the “use” estimates, so stocks to use (ending corn stocks as a percent of total corn use) should finish right around the 5.7% estimate we saw in December, but there is downside risk to that number, in our view.

Downside risk to South American Corn Production


Last month’s WASDE estimated corn production in Argentina and Brazil at 27.5 MMT and 70.0 MMT, respectively.  Our consultant is well below consensus for Argentina at 22.5 million MMT, with consensus looking for a reduction of closer to 2.0 MMT.  Our consultant’s primary concerns are the lateness of the crop and the amount of acreage that remains to be planted.

There may be some modest upside to the estimated production in Brazil, but almost certainly not enough to offset the weakness in Argentina. More likely is a stable estimate for Brazil.  The net impact is obviously bullish for corn.


WASDE May Be Bullish for Corn Prices - Corn TTT


We remain bearish on corn

Despite what might be a noisy report this Friday, we retain our fundamental and quantitative bearish views on corn.  With planting intentions likely to reflect still elevated corn prices and likely bounce back in yields (weather dependent, of course) we anticipate a continued decline in the price of corn (as already partially reflected in the futures curve).


WASDE May Be Bullish for Corn Prices - Cost Curve



Robert  Campagnino

Managing Director






Q1 Macro Themes Conference Call January 15th

Q1 Macro Themes Conference Call January 15th  - Themes.dialin


Each quarter, Hedgeye's Macro Team, led by CEO Keith McCullough and DOR Daryl Jones, hosts a Quarterly Macro Themes conference call with a presentation and a live Q&A session for participants. The call will highlight three themes representing significant developing sectors or macro trends for the quarter, analyzing potential impacts across various scenarios and identifying investment opportunities. The Q1 2013 Macro Themes Call will be held Tuesday, January 15th at 1:00pm EST.              





1) #GrowthStabilizing: 

Both our research and risk management indicators are signaling a shift away from #GrowthSlowing and have a bullish read-through for equities as fund flows move out of bonds. The risk of the U.S. Debt Ceiling remains a factor; however, we expect a rebound from the consumer as Bernanke's Commodity Bubble continues to deflate. 


2) #HousingsHammer: 

Housing market fundamentals continue to strengthen and are expected to maintain and possibly accelerate their momentum through 2013. We see changes in key housing metrics driving further upside that includes inventory levels, pricing and household formation.       


3) #QuadrillYen:

With the recent election of prime minster Shinzo Abe and his appointment of Taro Aso as finance minster, Japan looks to dominate the macroeconomic news flow out of Asia in Q1 as it pursues a variety of unconventional monetary and fiscal policies. Still our favorite short in all of Global Macro, we believe the yen will continue its descent vis-a-vis the U.S. dollar and the euro, imposing a variety of spillover risks for Japanese and international financial markets. 


Please dial in 5-10 minutes prior to the 1:00pm EST start time using the number provided below. A link to the presentation will be distributed before the call, if you have any further questions email .

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 292394#


EARNINGS: A Look Ahead

#EarningsSlowing is one of the themes we closed 2012 out with, coinciding with #GrowthSlowing. With growth now stabilizing and several facets of the economy recovering, we’re taking a look at how 2013 is shaping up from an earnings perspective.  Right now, the consensus is that the next four quarters should show modest top-line comp acceleration on a year-over-year basis through 2013; there is headroom for revenue beats should economic activity & real growth accelerate. EPS comps should mirror that of top-line comps with the exception that on a two-year basis, consensus expects flat growth thru 3Q13.



EARNINGS: A Look Ahead  - SPX Comps   Estimates



One should consider that management using the fiscal cliff and Hurricane Sandy as an excuse if results disappoint for 4Q12. With the February debt ceiling negotiations adding an air of uncertainty to the earnings season, management will also be able to low-ball estimates and offer conservative guidance. The first quarter of 2013 faces a particularly tough comp stemming from favorable weather in 1Q12 and in terms of working days due to Leap Year & the Easter shift.  For those companies levered to weekday traffic/volume, working days shift to a small tailwind in 2Q/3Q13.


EARNINGS: A Look Ahead  - SPX EPS Comps   Estimates

COH: It's Looking Ugly

We added Coach (COH) to our Real-Time Alerts this week on the short side. The intermediate-term outlook remains bearish for us and for several reasons. Revenue is decelerating and the cost of growth is rising at Coach. Growth is dependent on the new ‘Legacy’ launch, its new men’s line and China. With the sell-side becoming increasingly bearish on the stock over the last five months, it’s hard to find positives in a room full of negatives with COH. 


Our 9-point duration screen posted below shows what we think of Coach from a revenue, margin and cash flow perspective over our three durations: TRADE, TREND and TAIL. While COH looks cheap relative to history at current levels – the reality is that valuation is not a catalyst.


COH: It's Looking Ugly - coach1

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