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Paying The Price

“Somebody had to pay.”

-Lloyd George


That’s what Britain’s Prime Minister had to say about German reparations at the Paris Peace Conference of 1919. He added, “If Germany could not pay, it meant the British taxpayer had to pay. Those who ought to pay were those who caused the loss.” (Paris 1919,pg 181)


What George forgot to mention was his founding of the British welfare state; part of the British bill had to cover government spending. The Germans didn’t like that. They didn’t like the pomp of John Maynard Keynes floating around Paris smoking the peace pipe either.


Oh yes, my friends, there are roots to this central planning Gong Show. They run far deeper than through Krugman’s craw. Japan is going to learn that the hard way now. Indeed, someone needs to pay the price. For the last decade American, European, and Japanese politicians have tried imposing that tax on their people via currency devaluation. Now the timing is ripe for politicians to pay the piper.


Back to the Global Macro Grind


To be crystal clear on our conclusion on how we think this ends for the Japanese people: in tears. Never mind a country that starts doing it with a quadrillion in debt, there has never been a country in the history of humanity that has devalued their way to long-term economic prosperity. Championing Japan’s economics today is the equivalent of cheering on the Weimar Republic circa 1924.”


The title of that Early Look was “Weimar Nikkei.” The date was May 30th, 2012. Today, the Japanese stock market is crashing.


To crash or not to crash, remains the question. Darius Dale and I get into this debate with clients all of the time – “so, when do you guys think this all hits the fan?”, “can’t the Japanese keep this going for a little while longer?”


It’s a very intellectual debate because all of Wall Street is trying to figure out how long a failed team of politicians (we call Abe and Aso the Keynesian Duo) is going to be able to suspend economic gravity.


And maybe that’s why even a hockey and football player (Darius was a 325lb offensive lineman at Yale) can remind you that there’s nothing intellectual about Krugman and/or Abe’s Policy To Inflate at all. It might sound clever, but as a practical matter it’s just dumb.


So what’s the risk to the Japanese completely screwing this up?

  1. The currency market stops believing this will end well (i.e. in sustained Japanese economic growth)
  2. The Yen rips and the US Dollar falls
  3. The Correlation Risk (USD vs SPX = +0.84 on our TREND duration) goes squirrel

I’d say those are some pretty big risks.


But don’t blame the politicians. Don’t ask them to pay the price. This isn’t the time to be talking about pounds of flesh or anything at all like that. Instead, let’s just watch the country where this whole money-printing experiment started (Japan) implode on the world stage.


The context of central planning history is critical:

  1. Post 1913 Federal Reserve Act gave birth to Bloomsbury flower power act of John Maynard Keynes
  2. Paris Peace Conference 1919 gave a platform for government spending gurus to lay the railway tracks of political plunder
  3. Post 1971 Nixon abandoning the Gold Standard, 1997 was a no brainer for Krugman to tell Japan to “PRINT LOTS OF MONEY”

To be fair, going back to the 13th century, free-market folks like Genghis Kahn have been fighting the aristocracy of kingdoms and political plunderers. So the idea that Charles de Gaulle devaluing his people’s currency was going to fail inasmuch as the Weimar Republic’s did and/or the 2013 Japanese version of the same will may be consensus amongst people who have studied history.


But who cares about causality (central planners), let’s talk correlation – this is where this market’s risk is at!

  1. As soon as the Japanese Yen snapped our 95.85 TREND line, the Weimar Nikkei went squirrel last night
  2. Closing down -6.4%, that puts the #WeimarNikkei in crash mode (-20.4% since May 22nd!)
  3. When the big stuff starts snapping and crashing like that, we get out of the way

Actually, we got out of the way before it happened – think Hedgeye-style “Waterfall”  - and how we proactively risk manage the oncoming entropy of a burst of interconnected H20 crashing over the damn. #oncoming!


With time this Correlation Risk (driven by political causality) will burn off – but not today; water doesn’t burn:

  1. USD/YEN snaps 95.85 TREND line as US Dollar Index snaps 81.21 TREND line
  2. Weimar Nikkei’s TREND line of 13,848 #snapped
  3. China, Hong Kong, Germany – all of their Equity markets are over the waterfall now too (bearish TREND)

Most of this isn’t new. It’s just all happening faster now. That’s how risk works – it happens fast. This is big water, moving real fast, and I can assure you that most of the macro “tourists” out there who didn’t respect either the Yen or Nikkei signal are now very wet.


What does this mean for our asset allocation?

  1. We already have a 0% asset allocation to Fixed Income (Bond Yields aren’t going down on this fyi)
  2. We already have a 0% asset allocation to Commodities (Gold is down on this, fyi)
  3. We’d already cut our US Equities allocation in half versus its max (on Monday)

Since we are bearish on #EmergingOutflows (Emerging Markets), we don’t have to deal with that this morning either. What we need to make a decision on is whether to get out of US Equities altogether.


Here’s how I think about US Equity Market risk:

  1. It all starts and ends with the Dollar; the TREND is broken (but can be recovered with time; long-term TAIL support = 79.11)
  2. SP500 TRADE line of 1624 is broken, but TREND support of 1583 remains intact
  3. US Equity Volatility TREND resistance of 18.98 is going to be under siege this morning

Volatility, entropy, convexity – this is the stuff that makes people go squirrel. Yes, I’ve used the squirrely metaphor 3x this morning because that’s what my inbox looks like. We are getting a lot of questions on this. Which means institutional clients are in the water.


My first move this morning will be to do nothing. We’re not wet, so we can watch this political gonger play out a little before we let the market tell us which of these interconnected TREND risks confirms.


As for who ultimately pays the price for all these unintended consequences, I formally nominate Bernanke, Kuroda, and Aso. Especially for that Aso guy, ripping their countrymen a new one via currency devaluation is something they should all be ashamed of.


Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $100.36-103.94, $80.46-81.21, 93.69-95.85, 2.06-2.27%, 14.61-18.98, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Paying The Price - Chart of the Day


Paying The Price - Virtual Portfolio


TODAY’S S&P 500 SET-UP – June 13, 2013

As we look at today's setup for the S&P 500, the range is 29 points or 0.71% downside to 1601 and 1.08% upside to 1630.           










  • YIELD CURVE: 1.87 from 1.90
  • VIX closed at 18.59 1 day percent change of 8.90%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Advance Retail Sales, May, est. 0.4% (prior 0.1%)
  • 8:30am: Init Jobless Claims, June 7, est. 346k (prior 346k)
  • 8:30am: Cont Claims, June 1, est. 2.978m (prior 2.952m)
  • 8:30am: Import Price Index, May, est. 0.0% (prior -0.5%)
  • 8:30am: Import Price Index Y/y, May, est. -1.4% (pr -2.6%)
  • 9:45am: Bloomberg June U.S. Economic Survey
  • 10am: Business Inventories, April, est. 0.3% (prior 0.0%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to purchase $2.75b-$3.5b in 2020-2023 sector
  • 1pm: U.S. to sell $13b 30Y bonds in reopening
  • 7:50pm: Bank of Japan meeting minutes for May 21-22


    • 8am: U.S. Energy Assn holds Energy Efficiency forum, w/ speakers Reps. Cory Gardner, R-Colo.; Peter Welch, D-Vt.; Paul Tonko, D.-N.Y.; Gov. Jack Markell, D-Del.; Senate Energy and Natural Resources Chairman Ron Wyden, D-Ore.
    • 10am: House Ways and Means Cmte holds hearing on taxation of multinational corporations
    • 10am: Senate Banking Cmte hears from FDIC Chief Economist Richard Brown, FDIC Inspector General Jon Rymer on lessons learned from financial crisis for community banks
    • 10am: FBI Dir. Robert Mueller testifies before House Judiciary Cmte oversight hearing
    • 10am: House Energy and Commerce panels holds hearing on DOE budget
    • 11am: Natl Governors Assn, Natl Assn of State Budget Officers hold conf. call briefing on biannual fiscal survey of states
    • 1pm: House Financial Svcs panel meets on “The Impact of Intl Regulatory Standards on the Competitiveness of U.S. Insurers.”
    • 2pm: House Judiciary holds hearing on SAFE Act, which would grant states, localities authority to enforce federal laws


  • World Bank cuts global outlook on China slowdown, Europe
  • Clearwire board backs Dish’s bid over Sprint’s lower offer
  • House passes bill to limit CFTC’s cross-border swaps authority
  • IBM’s U.S. job cuts reach at least 1,300, employee group says
  • RBS tumbles after CEO departure as 2,000 job cuts planned
  • Apple’s Eddie Cue key to defense of e-book price-fixing case
  • U.K. lawmakers slam Google over “contrived” tax strategy
  • EU extends review of GE-Avio deal after commitments offer
  • Boeing loyalists’ patience tested; Airbus wide-body takes off
  • Retail sales in U.S. probably rose on pickup in car purchases
  • Nvidia CEO sees sales of chips for cars increasing to $1b
  • U.K. urged by EU to probe currency rigging in Libor’s wake
  • BlackRock wants to enter Danish pension market: Borsen
  • Tyco’s Kozlowski should be denied new hearing: parole board


    • BRP (DOO CN) Bef-mkt, No est.
    • Casey’s General Stores (CASY) 4pm, $0.62
    • Restoration Hardware (RH) 4:05pm, $0.04


  • Gold Imports by India Seen Tumbling as Curbs Boost Titan’s Costs
  • Silver Faithful Taking $5 Billion Hit in Crossfire: Commodities
  • Copper Resumes Decline as World Bank Cuts Global Growth Forecast
  • WTI Falls for Third Time in Four Days as World Bank Cuts Outlook
  • Metalor Set to Complete Singapore Gold Refinery by Year-End
  • Gold Declines in London After Earlier Getting Boost From Dollar
  • Crop Prices Extend Declines After U.S. Sees Increasing Supplies
  • Robusta Coffee at 17-Month Low on Supply Prospects; Cocoa Drops
  • World Food-Import Bill Seen Below 2011 Record at $1.094 Trillion
  • Ethanol’s Best Performance Since 2006 Falters: Energy Markets
  • Commodity Hedge Funds Said by FAO Finding Profits Harder to Make
  • Green Pool Cuts Sugar Surplus by 23% as Brazil Turns to Ethanol
  • Indonesia Completes Probe Into Freeport Grasberg Tunnel Accident
  • Force Majeure in Indonesia Leaves Japan Copper Smelters Looking






















The Hedgeye Macro Team













Trade of the Day: LNCO

Takeaway: We covered our Linn Energy short (LNCO) at 10:43 AM at $37.42.

Book the tidy 3.9% gain. We are simply risk managing the range in one of Hedgeye Jedi’s Kevin Kaiser's best short ideas. He remains “The Bear” on Linn Energy.


Trade of the Day: LNCO - lnco

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


Takeaway: WOOF’s fundamentals appear to be improving into 2Q13; we’re leaning long on the stock, but remain on the sidelines for now.

This note was originally published June 07, 2013 at 12:00 in Healthcare


04 JUNE 2013 




Fundamentals Improving

We have been stalking WOOF on the long side for some time given our expectation for accelerating volume trends in 2013.  However, we had been expecting 1Q13 weakness, which is why we have avoided the name to date. 


Fundamentally, our view hasn’t changed.  We’re still expecting a recovery in 2Q13 SS Animal Hospital Metrics; partly because the 1Q13 comp was so difficult, but also because the 2Q13 comp is artificially deflated by utilization pull-forward into 1Q12 from the unusually warm winter.  Additionally, 2H13 will also have additional tailwinds (see link below for more detail)


WOOF: 1Q13 Headwinds Preceding the Recovery

03/15/13 11:52 AM EDT



We are already seeing signs of a rebound.  Veterinary Employment (our best read into WOOF SS Animal Hospital trends and one of two inputs in our WOOF regression model) is accelerating on a y/y basis into 2Q13.  






Stock Setup Mixed 

While 1Q13 results disappointed (worse top-line miss in almost 3 years), the stock rallied on the company's newly-created stock buyback program and a synthetic guidance raise (WOOF began excluding acquisition-related amortization from non-GAAP EPS).


The stock is no longer screening as a clear-cut long given its recent outperformace. However, we have a bullish bias on the stock given our expectation for accelerating organic growth, which do not believe the Street fully appreciates.








POSITION MONITOR: The Hedgeye Healthcare Position Monitor is a reflection of our fundamental view on the stocks listed. The TOP IDEA’s section represents our highest conviction ideas.  


WOOF: MIXED EMOTIONS - position monitor




6/07/13 - Nonfarm Payrolls, Consumer Credit



Thomas W. Tobin



Hesham Shaaban, CFA


Keith's Top-5 Tweets Today

Takeaway: Here's a quick look at Keith's top tweets.

Keith's Top-5 Tweets Today - twitter


Get the Dollar right, and you'll get a lot of things big Mac-ro right

@KeithMcCullough 3:22 PM


Bond bulls $TLT getting murdered by US #GrowthAccelerating scares in bond yields, even on stock down days

@KeithMcCullough 3:10 PM


$AAPL acts like 100 lbs of poop in a zip lock bag

@KeithMcCullough 10:11 AM


Biggest opportunity in the market is that everyone has to do Macro, and few have a macro process- long-term opportunity

@KeithMcCullough 10:07 AM


This market is in its most confusing spot of 2013 - doing a lot of watching now $SPY

@KeithMcCullough 10:02 AM

VFC: Investors Ignoring the BIG Question

Takeaway: The real question for VFC...Why remain an 'above-avg' portfolio instead of entering the seller's market and downsizing to a GREAT portfolio?

CONCLUSION: We think that VFC succeeded in focusing investors on the big picture at its Analyst Day, but there is still a massive 'trust me' element to this model. Granted, management has earned the benefit of the doubt, but a lot needs to go right to hit its targets. We think the bigger question people are not asking is why this company has five different Brand Coalitions and is operating an 'above average' portfolio, instead of downsizing to a portfolio that is truly 'great'.  After all, it's a seller's market.



We've read through a lot of commentary about the VFC analyst day, and as quantitatively concise as the company's targets are, there were elements of the presentation that we don't think are well represented in the risk/reward. The general sentiment sounds something like  a) Same 'ol great quality management, b) aggressive 10% global sales growth targets (presuming acquisitions come through), c) a hockey stick acceleration in EBIT margins from 13.5%-16.0%, d) $18.00 in EPS in 5-years (better than the $17.00 in '17 that they are setting as 'official' goals), and e) a 300-400bp improvement in ROIC. 


Presuming the company hits its goals, the stock is trading at 10x that earnings number today, or 17x 2013. IF you believe these targets and think that current peakish multiples can hold for another 5-years, you're looking at about a $300 stock in 5-years  (1827 days, but hey, who's counting?), or a 10-12% CAGR in VFC's stock.   That's nice, but a lot needs to go right for it to happen, and the end result is a return that we'd consider 'about average'.


There's something about the crux of the presentation that did not sit well with us, and that's the lack of detail around how VFC is going to achieve these targets. We understand that it's hard to give such specific detail for a company with a portfolio of 27 brands.  But there was very much a feel of 'trust us…we'll do it.'  In fact, their overall tone was about as bullish as we've heard any management team in a long while.  And when we marry such a bullish tone with high yet unsubstantiatiated targets (that the Street will blindly bake right into their models), it makes us a bit weary.


In fairness, this is a management team that has earned our respect in executing upon its promised goals. So when they say they're going to do something, it means they're probably going to do it.  But adding $5.2bn to a $5.9bn Outdoor and Action Sports business over just 5-years? That's a big big number, and the supporting context was sparse.


The BIG Question

Regardless of the targets, here's a bigger question for us… The company plans to add $6.4bn in revenue over 5-years. Yet $5.2bn, or 81% of that is in the Outdoor and Action Sports arena.   They are making it clear that the Outdoor business is diversifying both geographically and seasonally to maximize growth potential while mitigating volatility.   It accounts for 55% of sales today, and within 5-years' time should be 64% of sales.  That's great. But the simple question is…"Why not 100% of sales instead of 64%? Why do they have the other four brand coalitions a all?"


We could justify being in the denim business. It owns two of the most stable and steady brands in the business in Wrangler and Lee.  In addition, it has a mid/high-teens margins and the highest ROIC at the company since it owns a significant portion of its own manufacturing facilities.


But as for its' other three Coalitions? Contemporary (7 for all mankind), Sportswear (Nautica), and Imagewear (Majestic)… why is it in these businesses at all? The brands are all what we'd consider 'average to above-average.' But we're only interested in owning brands that are truly 'Great'. VFC has three great brands. The North Face, Vans and Timberland, and they are all in the Outdoor Coalition. The other brands that are on the bench as being 'potentially great' (such as Smartwool, Napapijri, Reef, and Lucy) also happen to be in the Outdoor group.


We're not suggesting that VFC gets out of the 'portfolio of apparel brands' business. But simply that a more focused 'portfolio of Outdoor/Action Sports brands' might make a lot more sense. At a minimum, we'd pay a higher multiple for it. For example, the company is now trading at about 14x TTM EBIT. Two points of multiple expansion on a smaller, but more focused portfolio of outdoor and Jeanswear brands yields an immediate return 14% above current levels -- and that's before considering what we think would be between $1.5bn and $2bn ($13-$18/share) in proceeds from the rest of the portfolio.  This is wishful thinking, as we don't think VFC would ever consider going there. But this is where we think the most value would be created for shareholders.

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