Witness Fear

This note was originally published at 8am on February 22, 2013 for Hedgeye subscribers.

“In the taiga there are no witnesses.”

-Dersu The Trapper


That’s the opening volley from a book I just cracked open, The TigerA True Story of Vengeance and Survival (by John Vaillant). The “taiga” is not to be confused with the Amur Tiger. Both are to be feared, in different ways.


The taiga is where these killers prowl, in “the mixed broad leaf and conifer forests of Siberia.” As for the Siberian tiger itself, people “fear it, revere it, tolerate it, and sometimes hunt it.” (pg 19)


If you want something to scare the hell out of you, I’m betting that one of these hungry cats does it better than this market can.


Back to the Global Macro Grind


If I take you out back into the black bear bushes of Thunder Bay, Ontario (in the dark, with no crackberry or gun) I bet I can scare the hell out of you too. To be clear, there are times to fear – and yesterday wasn’t one of them.


After banging the top-end of our immediate-term risk range (immediate-term TRADE overbought on Tuesday, where we sold at 1530 SPX), the US stock market corrected for 2-days (from the all-time high in the Russell2000) and people were freaking out.




Or are they freaking out because they missed a +177 point move in the SP500 from the November lows, chased the February high, then got snow plowed? People have baggage, I get it. But let’s get real here – nothing about our bull case has changed.


To review:

  1. We are bullish on global #GrowthStabilizing (especially in Asia and the USA, not France)
  2. We are bullish on both US Housing and US Employment (Existing Homes Inventory reported -25% y/y yesterday!)
  3. We are bearish on Commodities, particularly Gold, Silver, and Food

So, if you want to get bearish on something, get bearish on something that’s actually gone down for more than 48 hours. Commodities and their related equities have been a relative train wreck for not only February, but since Bernanke’s Top.


Since Bernanke’s money printing top (September 14, 2012 - #timestamp it):

  1. The CRB Commodities Index (19 commodities composite) is down -8.7%
  2. And in the last 3 months, Gold and Silver are down -8.7% and -13.9%, respectively
  3. Wheat, Cocoa, and Corn are down -14.7%, -15.3%, and -6.8% in the last 3 months too

And if you don’t care on Cocoa (I don’t) and are a little shorter-term than that with a US stock market focus:

  1. For FEB to-date, Basic Materials (XLB) is down -3.3%
  2. The SP500 is +0.3% for the month-to-date

Wanna get nuts? I can get nuts. I can rip into a 40yr US Dollar Debauchery cycle rant like you have never seen. I can throw more historical data at you on what perpetuated the all-time highs in Commodities (2011) than you can shake a stick at. I can yell. I can scream. I can probably even win a butt-kicking contest versus a one-legged commodity bull on this, dammit!


(interviewing for Santelli’s job, so thanks for reading that)


Back to reality – I keep getting asked “well, Keith what about your call on US Dollar Correlation Risk from 2010-2012.” A: correlations in markets are never perpetual, and it’s 2013.


What do I mean by that? It’s just math. Here’s what’s happening in our immediate-term TRADE correlation model (vs USD):

  1. CRB Commodities Index vs USD correlation = -0.98! (uber negative correlation)
  2. Eurostoxx600 vs USD correlation = -0.68
  3. SP500 and MSCI Asia (Equities) vs USD correlations = +0.13 and +0.55 (note, they are positive)

So stop freaking out. Like the Reagan (1983-1989) and Clinton (1993-1999) US #GrowthStabilizing (then eventually accelerating) periods, Strong Dollar can become a pro-growth signal. Oh, and China likes Strong Dollar, down food prices too. Don’t you?


If you want to get scared, fear the biggest thing of all that can screw this all up - the government.


Out immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST10yr Yield, and the SP500 are now $1554-1617, $112.59-117.02, $80.63-81.53, $1.31-1.33, 92.87-94.39, 1.97-2.05%, and 1501-1530, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Witness Fear - Chart of the Day


Witness Fear - Virtual Portfolio

NAV: Share Loss Implied By Orders Positive for PCAR, Volvo, Daimler

Takeaway: NAV surprised to the upside, but lost 5 points of US and Canada class 8 share in its orders relative to the industry’s. Positive for PCAR.

NAV:  Share Loss Implied By Orders Positive for PCAR, Volvo, Daimler


  • Five Points of “Order Share” Loss YoY:  Navistar reported class 8 orders down 36% in the U.S. and Canada in their fiscal first quarter vs. an ~14% decline for the industry, by our estimates.  Relative to last year’s “order share”, Navistar was down about five percentage points to 14.1%.   
  • ISX Intro Saps 13L:  The small sequential improvement (~50 bps) may relate to the introduction of the Cummins 15L ISX Engine.  Roughly 40% of NAV's class 8 orders in the quarter used the newly introduced Cummins 15L engine, so MaxxForce 13L orders were weak.  That may benefit competitors’ 13L offerings.
  • Major Rally in NAV Shares:  Navistar’s management change, improved operating performance and better than expected liquidity position helped drive its share price higher today.  The stock is heavily shorted, a position we have not advocated because of numerous uncertainties (including a potential takeout). 
  • Long Paccar Easier Position:  Navistar’s emissions problems helped it to gain market share in early 2012, since many customers initially preferred the simpler, less clean EGR engine, in our view.  As Navistar introduces compliant products, pays non-conformance penalties and suffers from poor product perceptions, it may continue to lose significant market share.  NAV's loss in class 8 is PCAR, Daimler and Volvo's gain.  We see NAV’s expectation of improved market share through the year as unlikely, with further market share erosion during 2013 probable.
  • SCR + EGR 13L a Hard Sell:  We expect Navistar to struggle with the introduction of its new 13L engine.  While the 15L ISX is a well-established platform, the previous 13L MaxxForce has experienced serious perception issues. The new 13L, with two emissions technologies in the same engine, may be a non-starter with some customers, in our view.
  • Focus on PCAR:  Our discussion of NAV’s results focuses on the competitive dynamic with PCAR, one of our long ideas.  Please ping us if you have any questions on the specifics of NAV’s earnings report or 10-Q from today.


NAV:  Share Loss Implied By Orders Positive for PCAR, Volvo, Daimler - 1q


Today we bought Nationstar Mortgage Holdings (NSM) at $38.96 a share at 1:10 PM EDT in our Real-Time Alerts. Steiner books the gain in Morgan Stanley (MS) and flips it into NSM. Quarter was solid and the company’s positive outlook/guidance remains unchanged, but the analyst community is souring so we’ll take advantage.




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VIDEO: Can JCP Go Bankrupt?


Hedgeye Retail Sector Head Brian McGough appeared on CNBC this afternoon to discuss JCPenney's (JCP) current financial woes and whether or not the company should fire current CEO Ron Johnson. McGough argues that firing Johnson will put the company on the fast track to Chapter 11 bankruptcy.


Go to 6:48 into the video to watch Brian’s interview.

All Quiet On The European Front?

We don’t expect today’s press conference with the European Central Bank (ECB) to have a material impact on the EUR/USD currency pair. While the meeting does suggest bearishness due to a lower 2013 GDP target and downside on CPI outlook, ECB Chair Mario Draghi still has plenty of tricks up his sleeve that can support the Euro. Though the EUR/USD recently broke its TAIL line of support at $1.30, it quickly climbed back to its TREND line of resistance at $1.31. If anything is going to affect the Euro in the coming weeks, it will be the uncertainty over Italy’s next government. We play the Euro through the CurrencyShares Euro Trust ETF (FXE).


All Quiet On The European Front? - EUROUSD

Casual Dining Black Box Update

Black Box Intelligence released same-restaurant sales data for February.  As expected, the data is implying a significant deceleration in comparable sales and traffic trends.



  • SRS fell 5% in February
  • 1Q-to-date trends averaging -2.3%
  • Winter weather comparisons were a negative factor in first two weeks of February
  • The western region (weather not a factor) performed the best: SRS up 2.1%
  • New England performed the worst: SRS -8.9%
  • Traffic declined -6.2% on top of January’s decline of -3.1%.  The rolling 3mo decline in traffic is now -4.2%
  • Average check is running +3.3% in 1Q13, up from 1.6% in September 2012

Casual Dining Black Box Update - black box same restaurant sales


Casual Dining Black Box Update - blackbox average check



Some upcoming catalysts:


JPM, BofA, UBS conferences this week and next


Our favorite names:







Howard Penney

Managing Director


Rory Green

Senior Analyst


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