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In #StrongDollar, We Trust

This note was originally published at 8am on April 05, 2013 for Hedgeye subscribers.

“Kennedy Pledges He Will Maintain Value of Dollar”

-New York Times, 1960

 

As William Silber points out in Volcker – The Triumph of Persistence, that’s what JFK was rolling with 2 weeks before the 1960 US Presidential Election. It was a pro-growth campaign about American progress. A #StrongDollar has always symbolized that.

 

After LBJ, Nixon, and Carter spent 15 years devaluing the Dollar, this progressive conservative American mantra lost its place in the vernacular of what Hayek called the Political Economy. Why? Currencies and the central bankers that manipulate them get politicized.

 

After watching Bernanke devalue the Dollar as aggressively as any Fed Chairman since Arthur Burns (1970s), now you are watching the Japanese take a page out of his un-American playbook. That’s not a partisan comment either. Long-time Democrats will recall Kennedy’s thoughts about the US Dollar and monetary policy were crystal clear:

 

Price stability belongs on the social contract. We give the government the right to print money because we trust our elected officials not abuse that right, not to debase the currency by inflating… Failure to maintain those promises undermines trust in America. And trust is everything.” (Volcker, pg 53)

 

The world no longer trusts the Japanese.

 

Back to the Global Macro Grind

 

But do Americans trust President Obama and Ben Bernanke? Does Wall Street? Do we trust that if the US unemployment rate continues to surprise on the downside in 2013 that these politicians will get out of our hard earned currency’s way?

 

Today is a big day on that score. While it’s tough to get comfortable with a number that the US government effectively makes up, we’re confident that the market is confident that Bernanke is somehow confident betting the entire bond bubble farm on one made-up number.

 

To be balanced, if there’s one thing we are overly confident in, it’s that Bernanke’s growth forecasts will continue to be wrong. We think both US employment and consumption growth surprises to the upside during #StrongDollar periods like the one you are seeing now.

 

Does the market like this? Which market? First, let’s look at what USD Correlation Risk is telling us on a 1-month duration: 

  1. US Dollar vs SP500 = +0.84
  2. US Dollar vs Brent Oil = -0.71 

Hooowah! Al Pacino couldn’t have said it better. Like taking a flyer in a Ferrari for free, American Consumers absolutely love #StrongDollar, Down Oil. Basic Materials and Energy stocks, not so much.

 

Commodity-linked country stocks markets don’t like it either:

  1. Russia – RTSI down again this morning and down -13.3% since January 28th 2013
  2. Brazil – Bovespa is a big commodity index, and continues to be just nasty YTD (-10.3%) 

For Commodities overall, the last 2 months have been flat out nasty:

  1. Rubber -21.1%
  2. Silver -15.2%
  3. Corn -14.2%
  4. Copper -10.9%
  5. Platinum -10.7%
  6. Wheat -9.0%
  7. Brent Oil -7.9%
  8. Soybeans -7.8%
  9. Lean Hogs -7.4%
  10. Gold -7.4%

So, I guess if you are really long commodities, being long Gold right now would be your outperformer!

 

Long-time market history fans know that Gold has been annihilated, multiple times, during #StrongDollar periods. Until Nixon and Connolly (his politically compromised Treasury Secretary – the guy who rode in the car with JFK during the assassination) figured out how to Burn The Buck for political victory (1971), US Dollar strength (particularly in the 2nd half of 1969) crushed the Gold bugs.

 

But this is much larger than #AngryBugs at this point. This is really the first opportunity since Q1 of 2009 where #StrongDollar Commodity Deflation has provided a real-time Tax Cut to American Consumers of food and oil.

 

The Fed’s Bill Dudley would disagree with me on this, but I don’t think you can eat platinum or rubber. That said, producers who need such things to make what we consume will pay less for their inputs, if pervasive Dollar strength continues.

 

So, again – I call on the great market minds in Washington D.C. to do what’s right and:

  1. End the most dovish Fed policy in US history
  2. Continue with the shift toward conservatism in fiscal policy
  3. Spread the love about #StrongDollar’s benefits (Obama, Yes You Can!)

Especially at the pump and at our dinner tables, we can trust that a lot more than we’ve trusted the #PoliticalClass under any of the Nixon, Carter, Bush II, or Obama regimes. “And trust is everything.”

 

Our immediate-term Risk Range for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1548-1588, $105.68-108.93, $82.52-83.41, 94.04-96.35, 1.76-1.92%, 12.31-14.61, and 1549-1574, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

In #StrongDollar, We Trust - Chart of the Day

 

In #StrongDollar, We Trust - Virtual Portfolio


THE M3: MBS SINGAPORE LICENSE; COD CONCESSION EXTENSION; GONGBEI HOURS

The Macau Metro Monitor, April 19, 2013

 

 

MARINA BAY SANDS' CASINO LICENSE RENEWED FOR 3 MORE YEARS Strait Times

Marina Bay Sands' casino license has been renewed by another three years by the Casino Regulatory Authority.  The Authority said that it had imposed additional requirements on MBS during this new licence period. While no details were given on what these additional requirements were, the purpose of the requirements was to " institute, strengthen and maintain a rigorous compliance framework that is in line with Singapore's laws and regulations".  MBS' new licence will come into effect from April 26. A CRA spokesman added that MBS' compliance record was one of many factors considered when assessing the licence application.


CITY OF DREAMS' COMPLETION EXTENSION TO GET GREEN LIGHT  Macau Business

MPEL is expecting to be given an extension by the government on the completion deadline for the entire City of Dreams project on Cotai.  Under the current land concession contract, MPEL is still authorized to build an additional four-star apartment hotel at the site. But the company is looking to build one other five-star hotel tower instead.

 

A deal with the government was struck in March, but it has yet to be published in the Official Gazette. Depending on when gazetting occurs, the deal will give MPEL a new completion deadline, extending it by as much as four years from the original deadline of August 2013.

 

GONGBEI UNLIKELY TO OPEN LONGER DURING GOLDEN WEEK Macau Business

Gongbei customs post supervisor Lao Ngai Leong said that it is unlikely that the Gongbei border crossing will be opened for two extra hours during the upcoming May 1 Golden Week period, in which many mainland workers get one week off.

 

During the Ching Ming festival holiday period, from April 4 to 6, the Gongbei crossing opened at 6:00am instead of 7:00am, and closed at 1:00am instead of midnight.  Lao said that for the Gongbei crossing to be open for longer periods during all national holidays, the Zhuhai customs first had to overcome its lack of staff.




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Energy Gaps

“For unless man were to be like God and know everything, it his better that he should know nothing.”

-John Buchanan

 

The Gap in the Curtain (1932) is a novel by John Buchanan that speaks to the human desire for certainty, and the dangers its quest can bring.

 

In a London country house, five party-goers partake in an experiment that allows them a glance at a newspaper that will be printed exactly one year in the future.  The rest of the book tells the story of how that information affected each of their lives over the next year. 

 

One man reads of a business merger, spends the next year painstakingly traveling the world buying every share of the to-be-acquired company he can find, only to find that the business combination he read of was one nearly out of bankruptcy…  Another character reads his own obituary and dies of a heart attack the night before it prints; he does not live long enough to read the correction the paper issues on the following day for the typo…

 

---

 

This exchange from Core Laboratories’ (CLB) earnings call yesterday reminded me of the novel:

 

Analyst: “So, what’s your prediction, where is oil going from here?”


David Demshur, CEO of CLB: “Don’t have a clue, my friend.”


I sympathize with the analyst’s question – wouldn’t that be nice to know! – but, more so, I appreciated Demshur’s candid answer.

 

Gold is going to $2,000…  Oil will spike to $200/bbl…  My price target for the S&P500 at year-end 2013 is 1,458…


Wall Street loves making declarative statements.  I used to think that I had to make them too – I was scared to say “I don’t know,” as if I should have the answers to so many inherently unknowable questions.  But after several humbling experiences early in my career – i.e. being wrong – I have “resigned from the professional undertaking of coin-flipping,” to quote one of my favorite risk managers and thinkers, Hugh Hendry.

 

Sure, I have my biases – commodity prices tend to mean revert, oil lower (possibly a lot lower), Peyto Exploration (PEY.CN) higher (possibly a lot higher), LINN Energy (LINE, LNCO) and EV Energy Partners (EVEP) lower – but really I try to let the market tell me what to do (embrace uncertainty and our complexity-based models) and make solid risk-adjusted investment decisions given those signals.

 

Our playbook since the beginning of the year has been long USD and US consumption-oriented sectors, and short commodities and commodity beta.  Our Macro Team reviewed our #StrongDollar theme on our 2Q13 Macro Call on Tuesday – we’re bullish on the USD due to:

 

-          All-time low interest rates with the prospect of a hike;

-          Cessation of QE initiatives;

-          Improving housing and employment picture;

-          Addressing all-time highs in sovereign debt and deficit ratios;

-          USD solidified as world reserve currency at the expense of a weaker Yen and Euro.

 

From there we think that a #StrongDollar deflates commodity inflation and takes commodity-levered sectors (XLE and XLB) lower with it.  If you don’t think I should paint a broad brush across “commodities,” tell me why gold and oil have a +0.92 correlation since ’09 (see Chart of the Day).  We think it’s the same “inflation hedge” trade that’s now unwinding… 

 

Today, the risk management signals across the “financialized” commodity complex are still not good:

 

-          Gold is bearish TREND (needs to recover: $1,681)

-          Copper is bearish TREND ($3.58)

-          Brent Crude is bearish TREND ($110.54)

-          WTI Crude is bearish TREND ($93.88)

-          Energy Stocks (XLE) are bearish TREND ($76.87)

 

So as our fundamental #StrongDollar theme plays out, and oil and energy stocks begin to break down across our core TREND duration, we want to be underweight energy, looking for energy stocks to sell/short, and know that our energy long ideas have to be really tight (imminent catalysts or special situations) or levered mostly to natural gas prices (bullish TREND).

 

---

 

Two stocks that I think are worth selling are LINN Energy (LINE, LINCO) and EV Energy Partners (EVEP).  I wanted to hit on this in this note because these stocks are hugely popular among retail investors, which are attracted to that juicy yield (LINE 8%, EVEP 6.5%).  It’s kind of funny – any time Keith or I tweet about LINE/LNCO we get borderline hate-mail in return!  But how much cash a company pays out to its shareholders says nothing of the intrinsic value of the business – and these stocks are hugely overvalued, and their distributions sustained with capital raises.  The distributions paid are inconsistent with the economics of the businesses, and we think it ends in tears.  Hedgeye subscribers, do not be left holding the bag!

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, EUR/USD, UST10yr Yield, VIX, and the SP500 are now $1, $96.72-102.27, $81.95-83.11, 96.63-101.57, $1.29-1.31, 1.68-1.76%, 14.27-18.68, and 1, respectively.

 

Have a great weekend,

 

Kevin Kaiser

Senior Analyst

 

Energy Gaps - Chart of the Day

 

Energy Gaps - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – April 19, 2013


As we look at today's setup for the S&P 500, the range is 24 points or 0.56% downside to 1533 and 1.00% upside to 1557.     

                                                                                                                          

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.48 from 1.46
  • VIX closed at 17.56 1 day percent change of 6.36%

MACRO DATA POINTS (Bloomberg Estimates):

  • G-20 meeting of finance ministers, central bankers, Washington
  • 7:30am: ECB’s Weidmann, Germany’s Schaeuble hold press breakfast in Washington
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 12pm: Fed’s Stein speaks in Charlotte, N.C.
  • 1pm: Baker Hughes rig count

GOVERNMENT:

    • IMF/World Bank officially begin three-day spring meetings
    • 10am: Senate Judiciary Cmte holds hearing on immigration laws, w/ Homeland Security Sec Janet Napolitano
    • 2pm: State Dept releases 2012 Human Rights Reports

WHAT TO WATCH

  • Schaeuble says G-20 must honor deficit-cutting commitments
  • Blackstone is said to pull out of bidding for Dell
  • Softbank not planning higher Sprint bid, company executive says
  • Lenovo said to be in talks to buy IBM low-end server unit
  • FAA said ready to end Boeing 787 grounding as fix approved
  • U.S. bank profits disappoint most in 3 yrs as revenue falls
  • Fisker said to spend $660K on each $103K plug-in car built
  • Banker groups sue Treasury, IRS over account reporting rule
  • Viacom copyright suit against Google’s YouTube again dismissed
  • J.C. Penney’s operating chief joins talent head in departing
  • Pilot Corp. suspected of fraud in diesel rebates, FBI agent says
  • Humana fires law firm tied to alleged leak of Medicare decision
  • Toyota said to reveal plans to begin production of Lexus in U.S.
  • GDP, Apple, Exxon, BOJ, Iron Man 3: Week Ahead April 20-27
  • One Boston marathon bombing suspect dead, Federal official says 

EARNINGS:

    • Schlumberger (SLB) 6am, $0.98 - Preview
    • Baker Hughes (BHI) 6am, $0.62 - Preview
    • SunTrust Banks (STI) 6am, $0.61
    • General Electric (GE) 6:30am, $0.35 - Preview
    • Laboratory Corp of America (LH) 6:45am, $1.77
    • Honeywell International (HON) 7am, $1.14 - Preview
    • Genuine Parts (GPC) 7am, $0.98
    • Under Armour (UA) 7am, $0.03
    • Interpublic Group (IPG) 7am, ($0.13)
    • First Horizon National (FHN) 7am, $0.17
    • Kimberly-Clark (KMB) 7:15am, $1.34 - Preview
    • First Niagara Financial (FNFG) 7:15am, $0.17
    • State Street (STT) 7:21am, $0.93
    • Rockwell Collins (COL) 7:30am, $1.17
    • Manpower (MAN) 7:30am, $0.45
    • McDonald’s (MCD) 7:58am, $1.27 - Preview
    • TCF Financial (TCB) 8am, $0.19
    • Kansas City Southern (KSU) 8:01am, $0.88 - Preview

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Gaining as Physical Demand Said to Be ‘Extraordinary’
  • Gold Traders Split on Outlook as Asian Jewelers Buy: Commodities
  • U.S. Wheat Faces Damage Threat as Plains See Another Freeze
  • Copper Set for Biggest Weekly Drop in 16 Months on Demand View
  • Palm Oil Posts Fourth Weekly Decline on Biofuel Demand Concern
  • WTI Crude Advances for a Second Day to Pare Third Weekly Decline
  • Cocoa Climbs After North America Grindings Gain; Sugar Declines
  • Monsoon Seen Normal in South Asia Set to Boost India Growth
  • Carbon-Intensive Investors Risk $6 Trillion ‘Bubble,’ Study Says
  • Crude May Fall on Weaker Economy as Output Gains, Survey Shows
  • California Power Facing Biggest Test Since Enron: Energy Markets
  • Biggest LBO Collapse Seen as Boon to Texas Power Market: Energy
  • Nickel Surplus Seen Bigger by Macquarie Than Forecast Last Month
  • Rebar Rises to Pare Weekly Loss, Supported by Iron Ore, Demand

THE HEDGEYE DAILY OUTLOOK - 5A

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6A

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4A

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 


RH: #confidence

Takeaway: Several near-term risks were mitigated this qtr. In addition, we're taking up our 'already high' long-term growth forecast. 2 yrs = $60.

RH’s $0.02 ps beat far understates the significance of the company’s earnings report. After running the numbers and listening to the call, we walked away with the following thoughts:

 

1)      Confirmation that this management team is executing on one of the most intriguing business opportunities in retail. Comping 26% on top of a 22% in the same quarter last year, and that’s before the launch of new businesses like Tableware and Objects of Curiosity.

 

2)      Not only is the Design Gallery pipeline robust, but management seemed to have a (borderline odd) epiphany that it could open significantly larger stores with far more favorable rent structures than previously anticipated. Given that increased furniture sales will put a natural damper on margins over time, lower occupancy hurdles are a nice offset.

 

3)      We made a rather significant change to our model, in that we took the average size of a Design Gallery up from 25,000 square feet to nearly 35,000 over the next three years. The Boston store, for example, is nearly 50,000 square feet. With a weighted average of 35k sq feet and our estimate of 15 Galleries by the end of 2015, it gets us to weighted average square footage growth of 15% by that time period. The interesting element here is that bears (and even common logic) will say that current comp trends will roll, and over 2-3 years we’ll be looking at a stabilization in sales/square foot trends. With that being the case, the acceleration in square footage still drives 15-20% top line growth through this model. We think that’s the biggest part of this story that people are missing.  

 

4)      Find us a company that is taking UP expectations for both revenue and earnings for the upcoming quarter and year. It would have been easy enough for them to give initial guidance right in line with existing estimates. #confidence.

 

5)      De-risking Sentiment. Like it or not, sentiment is a major factor with this stock. We’ve been positive on the name since the IPO, and when we bring it up with investors it’s pretty clear to us that it’s not too far from JCP as it relates to being hated. The two most common reasons. 1) There’s not enough float. 2) The company is probably going to do a secondary (that probably explains why 1.4mm shares of the 4.2mm float is short). That’s ironic when you think about it. Half the people don’t like the lack of float, and the other half don’t like the one event that could fix the ‘small float’ problem.

Regardless, there are three things that happened this quarter that we think de-risk sentiment and improves ownership characteristics for RH.

  1. First, simple as it may be, the fact that RH finally ended what may be the longest quiet period in modern retail history is a positive. Other retailers are getting ready to report 1Q in 3-4 weeks, and RH is just getting out its 4Q numbers. It’s been a black hole of info, and it has not helped sentiment one bit. That’s over.
  2. IPO-related charges are out finally known, booked, and out of the way.  They made financial modeling a bear – and now that’s no longer an issue.  
  3. While we usually could care less about company guidance, the fact that RH issued quarterly and annual guidance is a massive positive for a levered and newly public company like this.

The reality is that so many people have had zero appetite for the name given such little float, funky accounting, no guidance, and such a huge delay in the earnings report.  The 4Q print ameliorated many of these concerns.

 

In the end, this remains one of our favorite longs. Its so rare to find a defendable high-end brand with such an obvious, yet fixable, distribution problem. Having stores that are only large enough to showcase 20-25% of the company’s product is like having a fleet of Ferraris and only a two-car garage. This is the one instance in retail where bigger stores is not only a positive, but it is a necessity. As these stores grow, the company can scale into new categories (kitchen, kids, art, flooring, art, collectibles, textiles, etc…), and subdivide existing ones  to drive productivity.

 

We think that the earnings guidance of $1.29-$1.37 for the year will prove conservative by at least 10%, and ultimately this is a company with $3 in earnings power over 3-years.  If that’s right, we’re looking at over a 20% CAGR in EPS, which makes 20x $3 in the realm of possibility. Granted, that is by the end of 2014, so there’s some time to go. But until people start to realize this potential, we’re not concerned about the stock being expensive. 


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 80.33%
  • SHORT SIGNALS 78.51%
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