Debating Growth

“All growth depends upon activity.  There is not development physically or intellectually without effort, and effort means work.”

-Calvin Coolidge


Former United States President Calvin Coolidge knew a thing or two about growth.  From a personal perspective, his life embodied steady growth of achievement.  His first foray into politics began in the Massachusetts House of Representatives in 1907.  He followed this up as Mayor of Northhampton, then became a member of the Massachusetts Senate, and after a couple of more stops became Governor of Massachusetts.


“Silent Cal”, as he was called due to his quiet demeanor, was then added to the Republican ticket as Vice President in 1920 and he and his running mate, Senator Harding of Ohio, went on to win in a landslide.   On August 2nd, 1923, President Harding died while on a speaking tour and Coolidge became President.  Coolidge then stood for election as President in 1924 and won his first official term as President.


From an economic perspective, largely based on a series of broad tax cuts, Coolidge oversaw a very economically prosperous time in U.S. economic history known as the “roaring 20s”. Interestingly, as well, as the top tax rates were cut from 58% in 1922 to 25% in 1929, the economy grew and the share of the tax burden of the wealthiest Americans, those making more than $100,000 per year, also grew from 35% to 63%.


In addition to the economic growth he oversaw, Coolidge also eventually outgrew his introverted personality.  In one his most outspoken moments, he said of his eventual successor Herbert Hoover, "for six years that man has given me unsolicited advice—all of it bad.”  Needless to say, the United States was not as economically fortunate under the stewardship of his successor President Hoover.


Back to the global macro grind . . .


Yesterday was a classic one for the ongoing debate over whether economic growth in the U.S. is accelerating or stagnating.  The Purchasing Managers Index (PMI) reading from Institute for Supply Chain Management (ISM) came in at a contraction indicating 49.0.  The internals of the report were negative across the board, as well, with new orders coming in at 48.8 and production coming in at 48.6.  The employment component of the index was still in expansion mode, albeit only marginally at 50.1.


The key read through from this reading is that as it relates to growth in the industrial sector in the U.S., headwinds remain.  On a relative basis, the United States is still faring better than the Eurozone where a 48.3 was reported in its latest PMI report, the latest in almost two straight years of factory output contraction in Europe.  The Chinese economy is also struggling on the industrial front as the HSBC PMI came in at 49.2 most recently.


Another data point that came out yesterday that supported the slowing growth case was government spending on construction.  Public construction spending dropped 1.2% in April to the lowest level since 2006 and down 5.7% from October.  This decline is obviously due to sequestration that is being implemented at the federal level.  In the short term, this may be an economic headwind, though the offset is that the deficit is declining much faster than expected.  In its most recent update the non-partisan Congressional Budget Office (CBO) projected that the deficit for fiscal year 2013 will fall to $624 billion, or about 4% of GDP, and almost $200 billion less than the CBOs estimate from three months before.


Our view of economic growth in the U.S. continues to be underscored by the consumer side of the economy.  On this front, the economic data released yesterday was positive as auto sales for May came in at an annualized rate of 15.3 million.  This was the fourth straight month of sales over 15.0 million and continues to show strong growth over the 14.5 million in auto sales from last year.  Certainly, auto sales are being driven by compelling financing programs, but as a proxy for consumer demand, they remain a positive indicator.


A key emerging American growth industry that will be a key tailwind for strong car production numbers is the U.S. energy industry.  In the Chart of the Day, we highlight this in a chart of U.S. oil production going back twenty years.  As the chart shows, largely thanks to technology advances, U.S. daily oil production is hitting 20-year highs.  This of course follows decades of production declines starting in the 1970s.


The International Energy Administration recently published a report that projected the North American oil supplies will grow by 3.9 million barrels by 2018.  This is almost 2/3rds of the non-OPEC production growth projected over that period.   If accurate, this will also reduce American imports by almost 40% over that period.  If the IEA is correct and this growth in production leads to a global “supply shock”, in coming years, the upside to global growth may be dramatic with declining oil prices.


Turning back to the shorter term and the U.S. stock market, another key positive we see relating to growth is expectations.  Currently, consensus aggregate SP500 revenue growth for the next three quarters is 0.5%, 3.4% and 2.3% respectively.  This is an expected revenue growth rate of  just over 2.0% in the projected period and less than half the average reported year-over-year growth rate of north of 4% in the prior three quarters.  For U.S. stock market bulls, these low expectations are very supportive.  For U.S. stock market bears, these expectations may well be, as Shakespeare said, “the root of all heart ache.”


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $100.27-103.29, $82.48-83.74, 99.98-103.24, 2.07-2.23%, 14.63-16.59, and 1, respectively.


Daryl G. Jones

Director of Research


Debating Growth - Chart of the Day


Debating Growth - Virtual Portfolio






May GGR shares:  SJM: 23%, LVS: 21%, Galaxy: 19%, MPEL: 14%, WYNN: 12%, and MGM: 11%.



Galaxy says it is looking for acquisitions in Macau.  Francis Lui Yiu-tung, the group's deputy chairman, said most of the HK$3.6 billion additional budget (HK$ 19.6 billion in total) for the second-phase expansion of Galaxy Macau was used for upgrading decor and facilities to "better cater to market demand".

Lui said the company was adding more slot machines for the mass market.  For Grand Waldo, which the group recently acquired for HK$3.25 billion, Lui said it would be positioned differently from Galaxy.  He added that the company had not yet decided whether Grand Waldo would focus on the mass market while Galaxy Macau catered to high-end gamblers. The acquisition is set to be completed in the next quarter.


Galaxy group is also considering other purchases.  "Land is the most difficult thing to come by. If we find any good investment opportunity around Galaxy facilities in Cotai, we will expand," said Lui.



Tokyo Governor Naoki Inose said he intends to set up a casino in the capital’s waterfront district, even though operating such gambling establishments is currently illegal in Japan.  “I expect the Diet to revise the law as soon as possible,” he said at the metropolitan assembly session.

The Waterfall

This note was originally published at 8am on May 21, 2013 for Hedgeye subscribers.

“A system can become locally ordered at the expense of a global increase in entropy.”

-Eric Chaisson


First, my family’s thoughts and prayers go out to the those personally affected by the natural disaster in Oklahoma.


Last week I wrote a note titled Sovereign Yield Risk that generated a lot of feedback. Since we put the Hedgeye platform at the heart of a wide open global network, feedback has become our greatest asset. Our research team has its own internal pipes of communication, but they don’t work unless we connect them to our client pipes and the new highway of dynamic information flow: #Twitter.


Both information and asset allocation flows matter to us, big time. Alongside price and volatility, they are critical factors that help us risk weight the probability of new bursts of entropy into the Global Macro matrix. Japanese Government Bond Yields breaking out above our long-term TAIL risk line would qualify as a new burst; so would a move toward 2.4% in 10yr US Treasury Yields.


Back to the Global Macro Grind


The recent 1-month move in both JGBs (we’re short them) and US Treasury Yields are 2 of the 3 most important things in my notebook this morning. The 3rd is gold. And all 3 of these major macro factors are interconnected to a causal factor with a catalyst.


Let’s review what I am looking at this morning:

  1. Japanese Government Bond Yields (10yr JGBs) = up another +5 bps to 0.89% this morning; +31bps in the last month
  2. US Treasury Yields (10yr) = up +1 basis point this morning to 1.96%; +25bps in the last month
  3. Gold continues to crash from its 2011 #BernankeBubble top, backing off -0.5% this morning after a 1-day dead cat bounce

As always, contextualizing these moves across our multi-duration model matters too:

  1. JGB long-term TAIL risk line = 0.81% (so we’re breaking out above that)
  2. UST 10yr long-term TAIL risk line = 1.82%
  3. Gold snapped its long-term TAIL risk line of $1681 in January (not new)

You can ignore the entropy associated with 1 or 2 of these TAIL lines snapping (I hope you didn’t ignore our Gold signal 6 months ago), but it’s really hard to ignore all 3 of them; especially when the mother of all bursts of entropy (#StrongDollar) is in motion.


What matters most in macro is what happens on the margin. That’s why Ben Bernanke acknowledging what we have been signaling on employment, housing, and consumption #GrowthAccelerating will matter in his testimony to Congress tomorrow. That’s your catalyst.


To be fair to the #EOW (end of the world) guys, their thesis remains what ours was during Bernanke’s 2010-2012 QE marketing campaign. Consensus doesn’t think we will ever have real (inflation adjusted) growth in the USA again primarily because QE didn’t deliver it.


Ironically, but not surprisingly, the end of QE is the economic catalyst we’ve all been waiting for. #StrongDollar, Strong America.


To review the flow show:


1.       Expectations for incremental QE fade

2.       #StrongDollar manifests; Gold crashes

3.       Bond Yields rise


Like the thermodynamics of water flowing toward (and over) a damn, the flow show is happening in a locally ordered pattern – and the global burst of entropy (the waterfall) is going to be very hard to stop.


I don’t think mother Merrill explains flows this way, but that’s cool – I just want them to keep telling their clients to sell Gold, Treasuries, and Japanese Government Bonds so that they don’t get run-over by the only centrally planned bubbles that are left.


Mr. Macro Market gets this – look at the most recent burst of immediate-term entropy (3 week correlations): 

  1. US Dollar vs SP500 = +0.91
  2. US Dollar vs 10yr UST Yield = +0.92
  3. US Dollar vs Gold = -0.87

And since 3 weeks don’t matter to “long-term” investors, what if you contextualize 3 weeks within a 6 month TREND?

  1. US Dollar vs SP500 correlation (on a 6 month duration) = +0.79
  2. US Dollar vs 10yr UST Yield correlation (6 months) = +0.11
  3. US Dollar vs Gold correlation (6 months) = -0.78

In other words, one of these 3 things (UST Treasury Yields) does not look like the others (SP500 and Gold) on a 6-month duration, yet. But that’s precisely the risk management point – the probability of US Treasuries and JGBs correlating with #StrongDollar at an accelerating rate is now going up, not down. That’s new.


Can Bernanke not acknowledge both the economic growth stabilization of the last 6 months and the recent acceleration in US employment, housing, and consumption growth? Sure. I can have some IRS dude tell me the sun doesn’t rise in the East too – but that doesn’t mean I (or the market) has to believe them.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1339-1421, $101.27-105.31, $83.49-84.75, 101.42-104.48, 1.90-2.02%, 12.22-13.79, 980-1004, and 1647-1678, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Waterfall - Chart of the Day


The Waterfall - Virtual Portfolio

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Mortgage Rates Go Vertical

Takeaway: 30Y Mortgage rates backed up 35 bps in the last week and 70bps in the last month. Refi activity and affordability have taken a hit.

This note was originally published June 03, 2013 at 13:56 in Macro

Last week saw a significant back up in 30Y Residential Mortgage Rates as the national average rose 35 basis points W/W to 4.10% from 3.75% the week prior.  From the near historical low of 3.40% reached back on May 1st, we’ve seen an expedited 70 bps backup in rates over the last month. 


The move in rates holds a few notable impacts for housing.  First, the increase in mortgage rates should have a (unsurprisingly) significant, negative impact on refinancing activity – something that has already manifest in the MBA mortgage application data with refi activity down 12.3% in the last week and 23% over the last month.  This contrasts with Purchase Activity, which was actually up 2.6% in the latest week and down just 2.3% over the last month.   


While we believe the positive Giffen cycle in housing (see Here for fuller discussion) should continue to predominate with demand chasing higher prices in a reflexive fashion, higher interest rates have a direct, negative impact on housing affordability. 


Previously, we have shown (Here, slide 49) that under standard median income and DTI assumptions for a 30Y Freddie Mac Mortgage loan, a 10bps change in rates equates to an approximate 1.0% change in affordability.  A continued rise in interest rates would serve as a headwind to a further acceleration in home values, particularly as HPI growth comparison’s get steeper. 


While we would view the breakout in treasury yields alongside the material sector level performance divergences (XLF  +6.1%, XLU -9.0% in May) as pro-growth signals, with the housing recovery a key tenet underpinning our domestic growth outlook, we’ll certainly be monitoring rate impacts on affordability closely here.  


Mortgage Rates Go Vertical - 30Y Mortgage Rate 060313


Christian B. Drake

Senior Analyst 



TODAY’S S&P 500 SET-UP – June 4, 2013

As we look at today's setup for the S&P 500, the range is 21 points or 0.64% downside to 1630 and 0.64% upside to 1651.              










  • YIELD CURVE: 1.83 from 1.83
  • VIX closed at 16.28 1 day percent change of -0.12%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 8:30am: Trade Balance, April, est. -$41.0b (prior -$38.8b)
  • 9:45am: ISM New York, May, est. 55 (prior 58.3)
  • 10am: IBD/TIPP Econ. Optimism, June, est. 50 (prior 45.1)
  • 11am: Fed to buy $2.75b-$3.5b notes in 2020-2023 sector
  • 11:30am: U.S. to sell 4W bills
  • 12:30pm: Fed’s Raskin speaks on employment in Washington
  • 1:30pm: Fed’s George speaks on economy in New Mexico
  • 4:30pm: Baker Hughes rig count
  • 8pm: Fed’s Fisher speaks on monetary policy in Toronto


    • Brookings Inst holds webcast w/ IMF Managing Director Christine Lagarde on global economic outlook. 12:15pm
    • OECD Intl Tax Conf., w/ Treasury’s Mike McDonald speaking on investment climate in developing countries, IRS’ Michael Danilack delivers keynote, 8:30am
    • Roosevelt Inst holds conf. on political agenda, approaches to jobs emergency, w/ Sen. Tom Harkin, D-Iowa, Fed Governor Sarah Bloom Raskin, Rep. Jan Schakowsky, D-Ill., 8:30am
    • House Nuclear Cleanup Caucus holds briefing on Energy Dept’s clean-up program at Idaho Natl Laboratory, 4pm
    • House Ways and Means Cmte holds hearing on IRS targeting of groups seeking tax exempt status. 1100 Longworth. 10am
    • SIFMA, Finl Markets Assoc and Clearing House hold Prudential Bank Regulation Conf. Speakers include Sen. Mike Crapo, 11:20am
    • FDIC meets to consider rule on definition for which non-banks would be subject to agency’s Orderly Resolution Authority in event of collapse, 10am
    • House Energy & Commerce Cmte panel holds hearing on home builders, w/ Louisiana-Pacific CEO Curt Stevens, 10am
    • Former Treasury Sec. Larry Summers testifies before Senate Budget Cmte on fiscal, economic effects of austerity, 10:30am
    • FHA Commissioner Carol Galante; HUD IG David Montoya testify before Senate Appropriations panel on the FHA, 2:30pm
    • House Education and Workforce Cmte hears from Sebelius on HHS budget, 10am
    • Senate Banking Cmte holds hearing on Iran sanctions, w/ Treasury Undersecretary David Cohen, 10am
    • Software and Information Industry Assn holds discussion on patent litigation, w/ House Judiciary Chairman Bob Goodlatte, R-Va, 12pm
    • OSTP Dir. John Holdren testifies before House Cmte on Science, Space and Tech about Obama administration’s proposed consolidation, re-organization of fed. science, technology, engineering, and mathematics (STEM) programs, 2pm
    • Senate Commerce, Science and Transportation panel holds hearing on wireless communications, 2:30pm
    • VP Matthew Stepka testifies before House Homeland Security panel on emergency response, 10am
    • National Transportation Safety Board considers safety study on single-unit truck accidents, 9:30am
    • Natl Capital Planning Commission holds public mtg on changes to height building limits in D.C., 6:30pm


  • Microsoft CEO Ballmer said to be working on broad restructuring
  • General Motors to replace Heinz in S&P 500
  • Apple said to shift ad focus to support music-streaming service
  • AB InBev with Constellation seeks dismissal of antitrust suit
  • Dell trims CEO’s pay 14% as performance slips ahead of buyout
  • Icahn planning proposal for Dell to pay div.: N.Y. Post
  • Royalty Pharma takeover of Elan temporarily blocked by judge
  • Smithfield investor Continental Grain supports Chinese takeover
  • Scor to acquire Generali Reinsurance unit for $750m
  • Fox Broadcasting on appeal seeks to stop Dish’s AutoHop
  • Ackman reaping 3-fold gain will shrink Canadian Pacific stake
  • Australia’s central bank said still has room to cut benchmark interest rate
  • Euro-area April producer prices unexpectedly drop Y/y
  • U.K. construction unexpectedly resumes expansion last month


    • Dollar General (DG) 7am, $0.71, see preview
    • Bob Evans (BOBE) 4pm, $0.64
    • SHFL Entertainment (SHFL) 4pm, $0.20
    • Mattress Firm Holding (MFRM) 4:01pm, $0.36
    • NCI Building (NCS) 4:01pm, $(0.18)
    • Analogic (ALOG) 4:15pm, $0.84


  • Man Says Commodities Divergence Increasing Supply-Demand Role
  • Wheat Bear Market Worsens as U.S. Farms Lose Share: Commodities
  • Copper Rises on Supply Concern as Second-Biggest Mine Stays Shut
  • Rubber Gains From One-Month Low as U.S. Auto Sales Beat Estimate
  • Gold Falls in London as Equity Strength Curbs Investor Demand
  • Corn Falls as Planting Progress Eases Concerns of Reduced Acres
  • Ship Rates Rally Seen in Chinese Drive for Cleaner Coal: Freight
  • U.S. Wheat May Decline as Rogue Strain Spurs Concern, UN Says
  • Iron Ore Plunge Seen as Catalyst for Second-Half Freight Rallies
  • European Copper Premium Said to Increase in Past Month on Supply
  • Palm Oil Drops as Demand From India Seen Slowing on Weak Rupee
  • Crude Supply Falls From 82-Year High in Survey: Energy Markets
  • Oil-Price Assessors Say Post-Libor Rules Will Harm Markets
  • Commodities Daybook: Wheat Bear Market Worsens on Global Supply
  • WTI Drops After Biggest Gain in a Month on Fuel Supply Forecast






















The Hedgeye Macro Team












FDX: Substantial Acceleration



FedEx announced the accelerated retirement of its old, high cost aircraft.  Our thesis on FDX focuses on the FedEx Express restructuring opportunity. A key component of that restructuring is the need to eliminate high cost old aircraft.  Broadly, we believe the Express restructuring is a meaningful inflection point in FDX’s operating history, as the company refocuses substantial attention and capital spending on improving Express margins.  Today’s announcement appears to be a meaningful acceleration of that restructuring.


From our standpoint, the accelerated retirements are an extremely positive development.  As long as the company is able to maintain adequate capacity and manage the accelerated schedule, the elimination of high cost aircraft should bring forward the margin improvement that is the core of our thesis.  We have no doubt that the street will focus on what the retirements imply for the demand environment.  That said, looking at the scale of the acceleration in retirements, it seems possible that there will be a subsequent announcement related to accelerated deliveries/contracted capacity/network restructurings that facilitated todays announced actions (i.e. it may not be all because of weaker demand.)


For what seems to be a very meaningful announcement, we would have preferred more specifics.  However, anything that attacks FedEx Express’s cost disadvantage relative to competitors while rationalizing excess capacity should be a welcome development.



Positive:  Should Have Been Done Years Ago, So Faster Is Better


Accelerating the retirement of 86 aircraft out of a fleet of a few hundred commercial jets is a very meaningful move.  It also highlights the scale of FedEx’s high cost aircraft problem/opportunity.  Further, by our count, FedEx still has over 20 727s, which are now scheduled for retirement by July 1, 2013.  This move should pull forward substantial restructuring benefits.


While it is difficult to pin a number on exactly what the benefit of the accelerated retirements will mean for FY2014 without more specifics, we believe the improvement will be substantial relative to our former expectations.  If we assume 30-35 incremental aircraft or so are retired before the end of FY2014, our first cut estimate is $300-$600 million in FY2014 savings relative to our previous expectations (we still had them with some 727s).  That estimate could be low because of increased density in certain routes from capacity reductions.  It is difficult to estimate the timing of the additional retirements from the information provided and we have not assumed a revenue impact from the retirements or any impact on pricing.  As we get additional information, we will revise the estimated savings, but that is our best guess tonight.


Estimation error aside, our first cut estimate should emphasize the substantial scale of the renewal programs and the impact of the announced accelerated retirements. It will be interesting to see if FY 2014 estimates move higher as the street incorporates today’s announcement.



Negative:  Suggests Demand Outlook Has Eroded


“We can accelerate retirements of the MD-10, the 727 or the A310 fleets, if demand erodes. If demand were to rebound significantly, we have the ability to operate these assets until incremental lift can be acquired.” David J. Bronczek 10/10/2012


This accelerated retirement schedule certainly may suggest that FedEx Express projects “slower economic growth than previously forecast.” While that may be seen as a negative, the operating environment for FedEx Express will be what it will be.  At the margin levels achieved last quarter, there was so little profitability that Express really did not matter.  Margin expansion is critical for FedEx Express and accelerated aircraft retirements should expand margins.  Capacity reductions in the face of weak demand also tend to be rational.


However, it may not all be demand related.  As indicated on the FYQ3 earnings call, network restructuring may have allowed for capacity reductions targeted at older aircraft.


“While FedEx Ground and FedEx Freight posted solid financial results, the third quarter was very challenging for FedEx Express due to continued weakness in international air freight markets, pressure on yields due to industry overcapacity, and customers selecting less expensive and slower-transit international services. In response, as Dave Bronczek will tell you after Alan Graf's remarks, beginning April the 1, FedEx Express will decrease capacity to and from Asia and will aggressively manage traffic flows to place lower-yielding traffic in lower-cost networks. We are assessing how these actions may allow FedEx Express to accelerate the retirement of more of its older, less-efficient aircraft as part of our fleet modernization program begun several years ago. We remain focused on our strategic cost reduction programs, which are ramping up and on target.” - Frederick W. Smith 3/20/2013



No Need for Ground/Express Integration


While some have called for the integration of the Express and Ground networks, we do not see a need for that.  FedEx Express has plenty of scale in the Americas to compete.  FedEx Express should attack its own costs structure, as it is doing, before risking the substantial labor cost advantages that FedEx Ground enjoys.



For Perspective… 


The table below shows an expected aircraft schedule as of November 2012.  The changes announced today are likely to alter the schedule substantially.


FDX: Substantial Acceleration - rrr1





You can see here some of the reasons we do not like a simplistic sum of the parts valuation approach, but we find the estimates in the table below useful for understanding the opportunity inherent in the FedEx Express restructuring.  The table suggests nearly 70% upside in FDX shares if the restructuring is successful and little downside if it is not (assuming FedEx Express does not start to lose meaningful amounts, which seems unlikely to us).


FDX: Substantial Acceleration - rrr2


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