Don’t Hate. Participate.

This note was originally published at 8am on September 06, 2013 for Hedgeye subscribers.

“To others, being wrong is a source of shame; to me, recognizing my mistakes is a source of pride.”

-George Soros


I’ve only ever bet on a fight once.  It was for no money and with a guy who just happened to be standing next to the keg with me at the time.  The fight itself was a late night, inebriated 3 vs. 1 event in the back of the ‘football house’ in Springfield, MA. 


I bet on the “1”.   


The #Tell, so to speak, was when the “1” stealthily, but deliberately, led the “3” to the fence in the back corner of the yard.   


“Find the nearest fence and put your back to it” is Getting Jumped 101 material - but a person would probably only know that if getting jumped had actually been an acute risk in life for some protracted period.   


If one’s collective life experience was capable of driving a self-defense instinct to be so ingrained as to be fully active on the back end of a 6 hour binge drinking session, then the odds of an upset victory are probably better than backyard consensus has them set. 


Taking high probability swings at mispriced circumstances isn’t confined to markets.  I’ll probably retire from amateur fight betting with my 1-0 record. 


Professionally, we recently found ourselves in a stirring analytical scrap of sorts with an elite hedge fund manager over the conclusion on an investing idea.  In this particular instance, we turned out to be right. 


In defeat, the aforementioned manager didn’t become embarrassed, inimical or spiteful.  He became a client.   


Being wrong is okay, “I don’t know” is the right answer more of the time than most would admit, and egoless-ness and honest self-reflection in defeat is not a #Process (or person) you want to bet against longer term.   


Back to the Global Macro Grind….


Regardless of the flavor of this morning’s employment data, we’ll be invariably deluged with sound bites lamenting the low level of labor force participation.  Despite its descent to old-hat, punditry talking point over the last five years, Trend movement in labor participation remains critical to the forward growth outlook. 


After all, if population growth is slowing and the share of that population that is working is declining, productivity has some heavier lifting to do to keep real per capita output going in the right direction. 


Demographic, cultural, and institutional trends are generally glacial and collectively serve to drive the broader, directional Trend in the Labor Force Participation Rate (LFPR).  Over the last 5 years, the straightforward, central question facing economists is what temporary (& potentially permanent) impact the shock of the Great Recession had on labor participation. 


From a research perspective, the aspirational goal has been to discern what the prevailing gap is between where we are currently on the LFPR and where we would have been without the cyclical impacts. 


Academic literature over the last 5 years is replete with analyses attempting to decompose the cyclical and secular components impacting labor force participation.  On average, the research suggests around 40-60% of the decline in the LFPR since 2007 could be attributed to cyclical factors. 


The truth is that attempting to parse the Cyclical and Trend components of Labor Force Participation, with precision, is a quixotic pursuit.  It’s some amorphous combination of the two. 


From an investment perspective, understanding the principal drivers of the LFPR, the key considerations facing the forward outlook, and the highest probability TREND trajectory hold more practical significance than decomposing the Cycle/Trend impacts with exact precision.   


With that in mind, let’s take an abbreviated, Socratic tour of Labor Force Participation.   


What has been the larger Trend in Labor Force Participation?

Taking a long-term view, the Chart of the Day below illustrates the 3 primary labor participation trends which have prevailed over the last 65 years.  Briefly, from 1948 to the mid 1960’s, participation was largely stable. 


From the 1960’s until the turn of the century, driven by Baby Boomers (born 1946-1964) entering prime working age (24 – 54) and a secular increase in female participation, LFPR showed a persistent increase. 


From 2000 to present, the trend has been one of decline as the median age of the workforce rose, Boomers began matriculating towards retirement and dual recessions all weighed on the participation rate.


Is Labor Force Participation sensitive to the Business Cycle?

The correlations aren’t exceedingly strong, but yes.  Here, it’s sufficient to simply observe the LFPR in the post-recessionary periods in the chart below.  In each instance, the participation rate dips in the wake of the cyclical downturn. 


So, labor participation shows some economic/business cycle dependence and the broader Trend since the turn of the century has been one of decline.  With no peri-recession tailwinds from cyclical or secular factors, the fact that Labor Force Participation declined in the wake of the Great Recession is not a surprise. 


What has been the impact of domestic demographic Trends?

We’ll explore the multitude of factors impacting the LFPR in more detail in a subsequent note.  Here, we’ll consider the impact of age demographics on the Trend movement in the LFPR. 


Historically, different age groups have shown typical, largely fixed, participation rates.  Labor Participation peaks progressively from age 16 into the mid 40’s, gradually declines to age 64, then drops precipitously.  Thus, as population shares of the different age groups change it impacts the prevailing, aggregate participation rate. 


In addition to plotting the actual LFPR (blue line), in the Chart of the Day, we show the estimated trajectory of participation based on the average 1997-2007 participation rate by age for those aged 16 years and older (orange line).  The extrapolation suggests greater than ~40% of the decline in the LFPR post-2007 could be attributed purely to age demographic trends.


Extending the forecast, demographic trends, in isolation, would predict LFPR to decline to 64.1% in 2015 and a further decline to 62.5% in 2020.  Clearly, the Trend remains one of decline. 


What sits as a primary swing factor for LFPR over the intermediate term?

The level of long-term unemployed associated with the great recession was unprecedented.  If the long-term unemployed do come back then we can expect upward ‘cyclical’ pressure on labor force participation as economic conditions improve. 


If, however, the LT unemployed fail to return to the labor force, the recessionary shock could be viewed to have changed the structural and secular outlook for labor market participation.  In effect, shifting the LFPR Trend line lower, compressing the existent cyclical gap (i.e. the spread between the orange & blue lines below), and lowering the potential upward pressure on the LFPR (& unemployment rate) as economic conditions improve. 


Regardless of the cyclical impacts on Labor Participation, growth in the supply of labor will continue to slow vs the multi-decade average. 


A TREND deceleration in working age population growth alongside a decline/flattening in labor force participation rate will put secular pressure on domestic labor supply, serving as a headwind to potential GDP and a tailwind to real wage growth.   As a result, productivity gains will be an increasingly important driver of real output growth over the coming decade(s).


Innovation drives productivity.  Human Capital drives innovation.  Circumstance will necessarily drive our collective pursuit of human capital.  We’ll be increasingly responsible for our own (economic) fate – fancy that.   


Our immediate-term Macro Risk Ranges are now:


UST 10yr Yield 2.82-3.06%

SPX 1643-1667

DAX 8187-8297

USD 82.12-82.95

Yen 98.53-100.48

Brent 114.18-117.98 


Enjoy the weekend.  


Christian B. Drake

Senior Analyst 


Don’t Hate. Participate.   - LFPR Demographics


Don’t Hate. Participate.   - Virtual Portfolio

September 20, 2013

September 20, 2013 - dtr2



September 20, 2013 - 10yr

September 20, 2013 - spx

September 20, 2013 - dax

September 20, 2013 - nik

September 20, 2013 - euro

September 20, 2013 - oil

September 20, 2013 - natgas



September 20, 2013 - VIX

September 20, 2013 - dxy

September 20, 2013 - yen
September 20, 2013 - gold

September 20, 2013 - copper

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 80.46%
  • SHORT SIGNALS 78.35%

Buffett's Fed

“The Fed is the greatest hedge fund in history.”

-Warren Buffett


That’s what Buffett told students at Georgetown University yesterday. He was trumpeting “how much money” the Fed makes: “it’s generating $80 billion or $90 billion a year probably… and that wasn’t the case a few years back.”


Now isn’t that just fantastic. One of the greatest financial minds in US history is now marketing a political message that is about as anti Benjamin Franklin as it gets. Anti-savings that is. Where in God’s good name do you think these said “profits” come from?


They come out of American savings accounts. Even the Fed itself (St. Louis Fed) reminds us that the “growth rate of real GDP has been higher on average when the personal savings rate is rising than when it is falling (Gilder, pg 72).” The Founding Fathers wanted our children to respect their piggy banks, not some un-elected money printer clipping our hard earned coins.


Back to the Global Macro Grind


As George Gilder goes on to absolutely nail this topic in his new book, Knowledge and Power, “the entrepreneur is the savior of the system because he capitalizes himself. He is his own most important capital… socialists believe their mission is to seize capital for the masses…” (Gilder, pg 77)


That’s what Mr. Buffett should be marketing. It’s time to get our money out of the Fed’s hands and back into the hands of The People. We know how to generate returns. We’re the ones who are going to be doing the hiring when we make money. All the Fed’s “profits” do at this point is tax the American consumer. It’s called Down Dollar driven inflation. It’s regressive.


Moving on… where the rubber meets the road here is in terms of the purchasing power of your hard earned currency. While I was disgusted with Bernanke’s decision to debauch the Dollar again this week, that doesn’t mean he’s going to win this war for good. In the last 24 hours, both the data (economic gravity) and Mr. Market are fighting back:

  1. US Dollar Index is up +0.2% this morning to $80.41 (holding long-term TAIL risk support of $79.11)
  2. Gold and Silver are down -1% and -2.4%, respectively (both are still bearish TREND and TAIL in our model)
  3. Oil (Brent) failed to breakout above our immediate-term TRADE resistance line of $110.94/barrel

Economic data? Yes, as in the stuff Bernanke has un-objectively ignored since almost every high-frequency US economic data series we follow started to accelerated in July.

  1. JOBS: non-seasonally adjusted rolling US Jobless claims hit yet another YTD low (-16.4% y/y) yesterday!
  2. ORDERS: the Philly Fed’s “New Order” component ripped a +21 SEP vs +5 in AUG
  3. HOUSING: US Existing Home Sales hit a 6-month high yesterday

Now most Fed apologists (which are mostly those who get paid by A) Government Power and/or B) Down Dollar) will whine about the impact of #RatesRising on the “housing’s recovery” instead of focusing on what really drives housing demand – confidence.


Although US Savings are at generational lows, US Net Worth is currently tracking at an all-time high. We’d argue that’s been largely driven by real (inflation adjusted) #GrowthAccelerating more so than anything else. US Home Prices up +12.4% y/y obviously helps, but the demand for housing won’t be impacted until the 30-yr mortgage rate blows through 6% (it’s at 3.79% today, get over it).


In other words, the greatest threat to US growth recovering is the government intervening in the economic cycle. There has never been a sustained US economic recovery that didn’t coincide with:


1.       Strengthening US Dollar

2.       Rising US Interest Rates


Why doesn’t every discussion about the Fed start and end with that?


While Buffett might love the impact Bernanke has on his P&L (fat net interest margins are driven by marking the short-end of the curve at 0% - that pays insurance companies (Berkshire) in size), I’d like to remind him that the “greatest hedge fund manager in history” is also the only un-elected central planner in US history to attempt to ban the economic cycle.


What is an economic cycle?


$USD/Interest Rates Higher --> Energy/Commodities/Inflation lower --> Real Consumption Growth Higher  --> Pro-Growth Equities Higher


With all due respect Mr. Buffett, why don’t you and your pal, Mr. President, want the rest of us “middle classers” to have that?


Sadly, there are very few leaders in Washington who have my back on this. That’s one of the reasons why I have the highest CASH position in the Hedgeye Asset Allocation Model since July 23rd. I don’t trust this rally to all-time highs anymore.


The biggest thing Bernanke lost this week was whatever was left of the trust I had in someone at the Fed doing the right thing. The timing was perfect. And he chose politics instead. If growth slows from here, Gold help him. Because history won’t.


Our immediate-term Risk Ranges (we have 12 of them in our Daily Risk Range product) are now:


UST 10yr Yield 2.70-2.81%


VIX 12.91-14.62

USD 80.20-81.25

Brent 107.62-110.94

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Buffett's Fed - Chart of the Day


Buffett's Fed - Virtual Portfolio


TODAY’S S&P 500 SET-UP – September 20, 2013

As we look at today's setup for the S&P 500, the range is 21 points or 0.77% downside to 1709 and 0.44% upside to 1730.                                       













  • YIELD CURVE: 2.42 from 2.42
  • VIX  closed at 13.16 1 day percent change of -3.16%

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 12:30pm: Fed’s George speaks on economy in New York
  • 12:40pm: Fed’s Tarullo speaks on regulation in New Haven
  • 12:55pm: Fed’s Bullard speaks on economy, monetary policy
  • 1:45pm: Fed’s Kocherlakota speaks in New York
  • 1pm: Baker Hughes rig count


  • House Republicans to vote on spending measure to keep govt funded for 2 1/2 months after Sept. 30 while cutting finances for Obama’s health-insurance overhaul plan
  • 9am: Congressional Black Caucus legislative conference, with speakers incl. Reps. Donna Edwards, D-Md.; John Conyers, Jr., D-Mich., Rev. Al Sharpton
  • 10am: Ron Paul, Reps. Thomas Massie, R-Ky.; Steve Stockman, R-Texas, address Campaign for Liberty’s Political Action Conf.
  • 1:45pm: President Obama speaks in Kansas City, Mo., on progress made since financial crisis 5 yrs ago


    • Google said to mull anonymous identifiers to replace cookies
    • Advertisers voice concerns on replacement of cookies: WSJ
    • CFTC sought admission of wrongdoing, fine of $100m, NYT says
    • Warren says JPMorgan admission may deter future wrongdoing
    • JPMorgan backs withdrawal limits for money-market funds
    • Auto co. lending practices probed for bias by U.S. agencies
    • European Medicines Agency monthly announcements expected ~7am
    • NYSE holding conf. call at close; expects increased activity
    • California online health exchange seen ready for Oct. start
    • Alabama Power must face U.S. coal plant suit: Appeals Court
    • RSA warns customers not to use product that has NSA flaw: WSJ
    • U.S. revives clean energy loan gurantee program, NYT says
    • AMR-US Airways merger risk seen ebbing as LCC shares rally
    • Empire State Bldg. REIT seeks more than $1b in IPO
    • Icahn says stocks, real estate overvalued by Fed’s practices
    • German Election, U.S. Budget, Syria, UN: Wk Ahead Sept. 21-28


  • Darden Restaurants (DRI) 7am, $0.70


  • Gold Cuts Weekly Advance on Slowing Physical Demand, U.S. Data
  • Gold Traders Most Bullish in Three Weeks After Fed: Commodities
  • Copper Heads for Biggest Weekly Rally in a Year After Fed
  • Palm Imports by India May Rise to Record on Oilseed Shortage
  • Onion Shortage Seen Worsening in India as Rain Delays Crop
  • Soybeans Drop to Four-Week Low as U.S. Crops Seen Evading Damage
  • Palm Oil Futures Post Second Weekly Drop as Ringgit Strengthens
  • WTI Set for Second Weekly Loss on Libya Restart; Brent Advances
  • NGLs Rebound as Shale Boom Spurs Record Exports: Energy Markets
  • Freeport Expansions to Boost Copper Sales by 1b Pounds, CEO Says
  • Rubber Pares Weekly Rally as Crude Oil’s Decline Cuts Appeal
  • Stanchart Sees Higher Commodity Prices Into 2014 on Recovery
  • Gold Meeting Breaks Mold as More Investors Seek Value in Miners
  • Copper Heads for Biggest Weekly Advance in a Year: LME Preview
  • Glencore Selling Bonds in Europe Amid Best Returns in Ten Weeks


























The Hedgeye Macro Team













FDX 10-Q Review: Shuffling vs. Restructuring



Our initial review of the FDX 10-Q shows some interesting inclusions and exclusions.  To the negative side, the Intercompany expense reshuffling away from FedEx Express is not clarified. There is also a disclosure that some salary increases had been delayed until FY2Q.  On the favorable side, the detail provided around the fuel surcharge lag suggests a greater impact than we initially assumed.  Further, the Express review dropped some of the negative language around the IP/IE trade down.  On balance, the 10-Q was not as favorable for our outlook as the earnings release, but that is fairly normal and we remain positive on the long-term potential for shares of FDX.



Intercompany Cost Allocation


The segment income statements show a $42 million in the Intercompany expense line decline at FedEx Express, along with allocation increases at Ground and Freight.  That represents a significant, potentially non-operating tailwind for the Express margin through expense reshuffling among segments.  We were looking for the 10-Q to provide some clarity and, yes, we should have questioned this item on the earnings call.  Instead, the 10-Q includes new cautionary language on intercompany cost allocation: “our allocation methodologies are refined as necessary to reflect changes in our businesses.”  It is very difficult to determine either the reason for or the appropriateness of the cost reshuffling away from FedEx Express.  The size of the change in the quarter is not that far off the total YoY margin improvement, so it is not an item to let slide.


(We have pinged the company for background, but the 10-Q was released after business hours and we will follow-up as needed.)


Salary Increase Delay


There was also a disclosure that FedEx Express benefited from “the deferral of annual salary increases from the first quarter of 2014 to the second quarter of 2014 for many of our employees.”  This was not quantified in the 10-Q and we have asked for additional background.  We suspect that it is not a sequential positive for FY 2Q 2014, but the magnitude is likely to be more modest than the change in intercompany cost allocation.


Express: Fuel Surcharge Lag Impact, Maintenance Holiday, Pension & Depreciation


The fuel surcharge lag appears somewhat larger than our initial expectations, leaving the underlying margin better, all else equal as presented.  This likely more than offset the benefit of the lower pension expense ahead of the new USPS contract.  (The USPS contract was filed along with the 10-Q for weekend reading.)  The higher depreciation expense looks to have been more than offset by lower maintenance, in part due to the 'maintenance holiday' provided by new aircraft.  Lower headcount also contributed.  The maintenance holiday will likely persist for some time, while the headcount contribution should improve as the voluntary severance program progresses this fiscal year.


Trade Down Toned Down


The 10-Q language around the trade down turned less negative, echoing managements’ comments that International Economy can be good business.  Language used in FY3Q 2013 such as “shifts in demand from our priority international services to our economy international services and lower rates resulted in declines in package yields…” has been replaced with more muted language, like the shifts “continue to impact this business”. We estimate that the accelerated IP to IE mix shift in the quarter was not nearly as negative for margins as it had been during FY13.


Share Repurchase


FedEx repurchased 2.8 million shares in the quarter at attractive prices, similar to 1Q FY13.  It is noteworthy, in part because FDX received a downgrade today from an analyst that would turn more positive if the company used its excess cash to pay higher dividends or buy in shares.  But FDX did buy in shares, so we fail to reconcile the analyst’s view of capital allocation with the downgrade.  That said, we like how FedEx focuses on running the business instead of promoting its buy backs. 


Other Items


There are a number of other items, including an update on the Independent Contractor litigation generally showing progress.  Please follow-up on any specific items of interest.



On Balance:  We still expect FedEx to improve the Express segment margin, eventually matching competitors in this well-structured industry.  As the Express margin grinds higher, we would look for the market to place a higher value on the segment.  The margin expansion will need to have more substance than cost shuffling between segments and time periods.  We see specific items, such as refleeting, headcount reductions, network alignment and facility consolidation, that should help drive sustainable profit improvement.  We also still think FDX should by TNT.  We will continue to look for progress on those items through fiscal 2014.






Jay Van Sciver, CFA

Managing Director

111 Whitney Avenue

New Haven, CT 06510



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