Takeaway: A strong quantitative argument can be made for the FOMC board to remain on hold throughout the balance of 2013 and throughout 2014 as well.



  • A strong quantitative argument can be made for the FOMC board to remain on hold throughout the balance of 2013 and throughout 2014 as well. This debate is likely to become increasingly mainstream in the coming weeks and months and will have meaningful implications for the US dollar, US interest rates and global capital and currency markets at large.
  • Investors attempting to get inside of Bernanke's head and/or view the economy as the FOMC board does should arrive at the following three conclusions based on the most recent data:
    • Reported US economic growth is sluggish at best;
    • The labor market has cooled off substantially; and
    • Benign reported inflation will give policymakers ample headroom to continue easing even if the labor market starts to accelerate meaningfully.
  • Regarding the latter point, both St. Louis Fed President James Bullard and Chicago Fed President Chuck Evans (the both of whom are voting members on the FOMC board) have been calling out low inflation as their chief economic concern in recent weeks/months.
  • Our analysis suggests the US economy may have to sustainably record Real GDP growth in the +3% to +3.6% range in order to generate the kind of job creation necessary for the Unemployment Rate to breach the Fed’s 6.5% threshold over the intermediate term (holding flat other factors like the Labor Force Participation Rate).


Like most market participants, we were surprised by the Fed’s decision not to taper its asset purchase program last week.


In our view, both the pace and slope of economic growth has been solid enough to justify commencing a process of weaning the economy and its capital markets off of  large-scale asset purchases (LSAP).


The critical takeaway from the aforementioned statement is not the part about the pace and slope of economic growth; rather, the key element of that declaration was indeed the phrase, “in our view”.  


Specifically, “our view” of the pace and slope of economic growth is wholly shaped by leading and concurrent indicators, such as market prices, survey data (such as New Orders PMI readings) and our proprietary analysis of that data (e.g. modeling market prices with Keith’s quantitative risk management levels or something like tracking the YoY % change in Rolling NSA Jobless Claims).


Moreover, our process is designed to front-run inflection points in the market(s) and/or policy. Thus, an overt focus on concurrent-to-leading indicators is a prerequisite for any repeatable success in doing so.  


The Fed, on the other hand, primarily focuses on lagging economic indicators, like Unemployment, Core PCE and Real GDP. Their primary responsibility is to set monetary policy based on actual – not guesstimated – economic conditions. Thus, an overt focus on lagging indicators is appropriate for their task as it is defined.


While we’d certainly prefer they apply more modern-day analytical techniques (i.e. chaos theory, behavioral economics, etc.) to their policy-setting agenda, for the purposes of keeping this note tight, we will temporarily concede to the consensus view among the academic economist community that the Fed should be more measured (i.e. less dynamic) with respect to setting monetary policy.


All told, understanding this distinction between what market participants are focused on and what the FOMC board is focused on is critical to appropriately preparing your portfolio for the Fed’s next policy move and, more importantly, the timing therein.


Looking at the economy from the Fed’s perspective, it should not have come as a surprise to see them back away from tapering at last week’s FOMC meeting. If anything, their only fault was allowing tapering speculation to percolate throughout the global financial community in the first place!


  • In the 12M through 2Q13 (the latest reported figure), the US economy has grown only +1.6% on real basis; that rate of change represents a full standard deviation below the trailing 3Y trend.
  • In the QTD, Nonfarm Payrolls have averaged +136k MoM; that’s nearly one full standard deviation below the trailing 3Y trend (-0.9x) and down sharply from an average pace of +207.3k MoM in 1Q13.
  • In the 12M through JUL ’13 (the latest reported figure), underlying inflation – as measured by the Fed’s preferred measure of Core PCE – has tracked +1.2% YoY; that’s nearly one full standard deviation below the trailing 3Y trend (-0.9x).


Investors attempting to get inside of Bernanke's head and/or view the economy as the FOMC board does should arrive at the following three conclusions based on that sequence of data:


  1. Reported US economic growth is sluggish at best;
  2. The labor market has cooled off substantially;
  3. Benign reported inflation will give policymakers ample headroom to continue easing even if the labor market starts to accelerate meaningfully.


Regarding the latter point, both St. Louis Fed President James Bullard and Chicago Fed President Chuck Evans (the both of whom are voting members on the FOMC board) have been calling out low inflation as their chief economic concern in recent weeks/months.




Absent a dramatic near-term acceleration in core inflation – which is all but impossible given the neutering of consumer price indices in recent decades – the Fed is unlikely to find it appropriate to tighten monetary policy [via tapering… tapering is tightening, FYI] over the next few months.


Looking ahead to next year, one really has to see a dramatic acceleration of momentum in the labor market in order for the FOMC board to justify tapering LSAP – irrespective of whomever winds up in charge (no disrespect to Janet Yellen).


By our math which looks at the historical relationship between the deviation from trend in MoM Nonfarm Payrolls SA and deltas in the Unemployment Rate SA, the former series would have to average somewhere between +218.1k and +260k for five quarters in order for the latter series to reach the Fed’s 6.5% “target” (FYI, 6.5% is NOT a target for the initiation of tapering, as Bernanke has repeatedly stated in his recent commentary).




Regarding the study, please note that we purposefully decided to cap our study at a 10Y look-back; similar results hold over a trailing 30Y period as well, but we decided to front-run consensus pushback about how the labor market is structurally different today vs. 20Y or 30Y ago. We get it…


Moving along, it’s worth stressing that five quarters from now is the end of next year; not ironically, that is exactly when the FOMC board expects Unemployment Rate to hit that level.


Of course, maintaining the aforementioned pace of job creation for such an extended period of time would no doubt drag up the average and dampen any future deviations from trend. We understand that and would still expect to see continued improvement in the Unemployment Rate in spite of that – the purpose of this study is simply to gauge what level of economic performance we need to see in order to appropriately front-run the Fed from here.


Looking at the historical relationship between the deviation from trend in YoY Real GDP growth and the deviation from trend in MoM Nonfarm Payrolls SA, the former series would have to average somewhere between +3% and +3.6% produce readings in the latter series that are +1x to +2x standard deviations from the trailing 3Y trend. Using the most recent data set to reverse engineer those deviations produces the aforementioned range of +218.1k and +260k.




Of course, the pace of job creation isn’t the only factor in determining deltas in the Unemployment Rate; rather, there other key indicators, such as the structurally challenged Labor Force Participation Rate, that are integral components of the calculus.


Still, for anyone looking to correlate economic growth to a pace of job creation that is appropriate for the FOMC board to authorize a reduction in its LSAP program, we’d advise anchoring on anything north of +3% YoY. That’s nearly a double from the latest reported rate.


We consider it noteworthy that the Fed’s full-year 2014 GDP growth projection is right in line with that rate, effectively confirming that their economic growth expectations are on track for a 6.5% Unemployment Rate target by EOY ’14.


Right now, our model can get as high as +2.7% for 2014E Real GDP growth, but that’s not an estimate we would advise lending any credence to at the current juncture. As mentioned our previous works, our predictive tracking algorithm is designed to capture deltas and inflection points on a rolling 1-2 quarter basis. It’s worth nothing that trying to predict anything much further out than that tends to negatively skew the balance between facts and assumptions in any economic model.




Even if the economy can get up to and sustain a +3% rate of growth over the intermediate term, investors must continue to be cognizant of the fact that subdued core inflation will continue to keep the doves on the FOMC board uneasy about the mere thought of tapering – let alone hiking the Fed Funds Rate (which is what they likely intend to do when the Unemployment Rate reaches 6.5%, assuming both reported inflation and inflation expectations are in line with the committee’s +2% objective at that time).


Not surprisingly, those market participants closest to the pin-action are already starting to bake this scenario in. The implied probability of the Fed Funds Rate being 0.0% at the DEC ’14 FOMC meeting has increased from 7.7% in early SEP to 25.5% currently. Conversely, the implied probability of the Fed Funds Rate being hiked to 0.75% or 1% at the DEC ’14 meeting has dropped to 7.8% and 1.5%, respectively, from 23.2% and 10.4%, respectively, in early SEP.




All told, a strong quantitative argument can be made for the FOMC board to remain on hold throughout the balance of 2013 and throughout 2014 as well. This debate is likely to become increasingly mainstream in the coming weeks and months and will have meaningful implications for the US dollar, US interest rates and global capital and currency markets at large.


Have a wonderful evening,


Darius Dale

Senior Analyst



On the Radar: J.C. Penney

Editor's note: This is a brief excerpt from a note Hedgeye Retail Sector Head Brian McGough sent out this morning. For more information on how you can subscribe to Hedgeye research please click here.


On the Radar: J.C. Penney - jcp2


What’s New Today in Retail (9/23)



JCP - J.C. Penney Said in Talks to Raise More Money for Turnaround



  • "J.C. in talks to potentially raise more cash, said people with knowledge of the matter. The chain doesn’t have immediate cash needs, and is exploring fundraising amid shareholder pressure to take advantage of cheap financing, said the people, who asked not to be named as the deliberations are private. Goldman Sachs...which arranged a $2.25 billion loan for the retailer this year, is advising J.C. Penney on funding options including borrowing against its real estate, said one of the people."
  • "One option under consideration is for J.C. Penney to borrow against the real estate that it hasn’t already pledged as collateral on other debt, three people said. J.C. Penney values its owned and ground-leased real estate at $4.08 billion, according to a May investor presentation."

Takeaway: JCP does not need the cash right now, and our math suggests that it can go the next three years without tapping external sources. But a key consideration is that a new CEO would likely want to come in with zero liquidity risk. Our sense is that JCP is doing this to broaden the pool of potential CEOs.


On the Radar: J.C. Penney - jcp1


JCP - JCPenney Cuts Off Free Wi-Fi



  • "JCPenney is busy undoing the work of former CEO and ex-Apple retail head Ron Johnson, and this week the company is axing the free Wi-Fi he once dubbed 'fundamental architecture' for stores. The retailer confirmed the removal of the service to BuzzFeed after shoppers voiced their displeasure on Twitter. A JCPenney spokesperson explained that the signal wasn't used very often by customers."
  • "JCPenney has already invested $12 million installing the system last year, but shutting it off for customers will save the chain about $7 million a year, according to BuzzFeed."
  • "...CEO Mike Ullman, the investment hasn't been worth it. In addition to slow usage, he said the mobile checkout technology that was based on the Wi-Fi was confusing for most customers. Shoppers also don't tend to realize free Wi-Fi in a store exists, or just choose to use their own data plan instead. Mobile checkout will still be able to run on the private Wi-Fi network, but Ullman will put a new focus on making sure store associates are visible and able to assist customers."

Takeaway: This borders on ridiculous. But the reality is that people don’t go to JCP to get free Wi-Fi. 



Regional markets looked better in August but that was predictable.


  • Mature regional gaming market revenue declined “only” 1.0%, beating our projection slightly.
  • However, the underlying trends are not good and we expect that to show through in September
  • Given the results from June-August, we estimate September 2013 same-store casino revenue will fall more than 8% (down 1 Saturday)


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.


Takeaway: Hedgeye CEO Keith McCullough offers his thoughts on this Pulitzer Prize-winning book.

American PrometheusThe Triumph and Tragedy of J. Robert Oppenheimer, by Kai Bird & Martin Sherwin (2005)


This book captures the complexity of the human mind but, at the same time, simplifies the predictable behavior of politicians. In many ways Oppenheimer’s story reminds us how fragile our freedoms can become.


Summary Thoughts

  1. Deserving winner of a Pulitzer Prize; a true human story of science, evolution, and conscience 
  2. Knowledge threatens political power; especially when it has a liberal mind that doesn’t pander to government
  3. Respect (from practitioners) vs. Reprimand (by politicians) – Oppenheimer battled bureaucrats to his grave




Content Highlights

  1. “Damn it, I happen to love this country.” (pg 3) #truth, Oppenheimer wasn’t the communist his haters wanted him to be
  2. “He received every idea as perfectly beautiful” (pg 9) #objective research defined
  3. “Well, neither one of us came over on the Mayflower” (pg 25) on being Jewish, Oppie to his Scotch-Irish friend at #Harvard
  4.  “The notion that I was travelling down a clear track would be wrong” (pg 29) #honesty about learning (1922 enrolled @Harvard)
  5. Proust’s “A La Recherche du Temp Perdu” (pg 51) a book that left an impression on him in college #introspection
  6.  “Becoming a scientist, Oppenheimer later remarked, is like climbing a mountain in a tunnel” (pg 67) #Gottingen 1927 Germany
  7. “Quantum mechanics describes nature as absurd from the point of view of common sense” –Feynman (pg 79) #Oppie liked
  8. “Oppie” = title of Chapter 6 (Oppenheimer’s nickname, humanizes the man as he moved on to teach in California)
  9. “How far is it wise to respond to a mood?” –Oppenheimer in #1930 (pg 95), we was 26 yrs old, #mentoring brother Frank
  10. “In 1936 my interests began to change” –Oppie (pg 111) met his 1st love, young #communist party member, Jean Tatlock
  11. “FBI would never resolve the question of whether or not Robert was a CP member” (pg 142) b/c he wasn’t a #communist
  12. “devoted to working for social and economic justice… he chose to stand with the left” (pg152) left isn’t Russian Communist
  13. “By the end of 1939, Oppenheimer’s often stormy relationship with Jeadn Tatlock had disintegrated” (pg 153)
  14. “I’d had about enough of the Spanish cause… there were more pressing crises in the world” (pg 178) #1941 post Pearl Harbor
  15. “Only an atomic bomb could dislodge Hitler from Europe” –Oppenheimer to #Teller in #1942
  16. “Groves is a bastard but he’s a straightforward one” –Oppenheimer (pg 185) on his boss at #LosAlamos
  17. “He’s a genius, a real genius” –Groves on Oppenheimer (pg 185) #1942, peer #respect
  18. “Robert was beginning a new life. As the Director of a weapons laboratory…” (pg 205) #1942, he was 38 yrs old
  19. “No, no, you’re crazy… that’s nuts” –Dick Feynman (pg 217) Feynman, Bethe, Bohr + Oppenheimer = genius collaboration
  20. “Oppenheimer is telling the truth…” (pg 236) people may have not liked the #truth, but he was usually telling it; that’s life
  21. “I am disgusted with everything” –Jean Tatlock (pg 249), in #1944 Oppenheimer’s 1st love committed #suicide
  22. “December 1943, Niels Bohr arrived at Los Alamos” (pg 268) Oppie was his #prophet
  23. “If Bohr was convinced, then Oppenheimer must have realized that German physicists were in all likelihood far behind” (pg 276)
  24. “Everyone sensed Oppie’s presence. He drove himself around The Hill in an army jeep” (pg 277) #leader amongst peers
  25. “Well, Roosevelt was a great architect, perhaps Truman will be a good carpenter” –Oppenheimer (pg 290) he respected POTUS
  26. “I feel I have blood on my hands” –Oppenheimer (pg 323) October 16, #1946 to #Truman (and Truman didn’t like the honesty)
  27. “Oppenheimer arrived in Princeton in mid-July 1947” (pg 369) he was appointed Director of Einstein’s Institute #thinktank
  28. “After Einstein, Oppenheimer was undoubtedly the most renowned scientist in the country” (pg 390) #1948 (so he was a #threat)
  29. “Our atomic monopoly is like a cake of ice melting in the sun…” –Oppenheimer (cover of Time Magazine 1948) (pg 418)
  30. “The Administration now supported a program to build a bomb 1,000x as lethal as the Hiroshima weapon” (pg 430)
  31. “You probably don’t know to what extent you have become my intellectual conscience” –George Kennan to Oppie #1950 (pg 431)
  32. “We may be likened to 2 scorpions in a bottle, each capable of killing the other, but only at the risk of his own life” –Oppenheimer (pg 462)
  33. In 1953 Oppenheimer sent the new Eisenhower Administration a report “urging a policy of candor” (pg 463) #transparency
  34. “I must reveal its nature without revealing anything” –Oppenheimer on #nuclear weapons in 1953 #candor (pg 463)
  35. “The President had read Oppie’s essay and had found himself to be in general accord with its argument” (pg 468) #Strauss was enraged
  36. Strauss and the anti-Oppenheimer hawks went after Oppie (ultimately he “collapsed on his bathroom floor”) (pg 484) #pressure 1953
  37. Einstein, not impressed, thought Oppenheimer “a man who was easily hurt and intimidated” (pg 498) #fair assessment
  38. “The Oppenheimer hearing thus represented … the narrowing of the public forum during the early Cold War” (pg 550)
  39. “It achieved just what his opponents wanted to achieve; it destroyed him” –I.I. Rabi (pg 551) #1954
  40. “How can the independent experimental mind survive in such an atmosphere?” –The New Statesman (pg 556) #1954
  41. “By the early 1960s, with the return of Democrats… Oppenheimer was no longer a political pariah” (pg 574) #JFK
  42. “I think it is just possible Mr. President that is has taken some charity and some courage to make his award” (pg 574)
  43. “In 1963, Oppenheimer learned that President Kennedy gave him the prestigious Fermi Prize” (pg 575) #validation
  44. “In 1965, Oppie visited his doctor for a physical… 2 months later his smoker’s cough became noticeably worse” (pg 581)
  45. “Robert has cancer” –Kitty (pg 582) #1966
  46. Oppenheimer’s Memorial Service was in Princeton on February 25, 1967 (pg 588)
  47. “Kitty took her husband’s ashes in an urn to Hawksnest Bay... and dropped the urn overboard” (pg 588) #St.John
  48. “That’s where he wanted to be” –Kitty (pg 588)



This note was originally published September 17, 2013 at 16:43 in Consumer Staples

Last week we held an expert conference call titled, "Are Energy Drinks Harmful?" with Dr. Deborah Kennedy, a pediatric nutrition and expert on energy drinks.


Below are our main conclusions regarding regulatory concerns and evolution of the space based on Dr. Kennedy’s presentation and our own work. We also size up Monster Beverage Corp (MNST), which we’re bearish on from a quantitative perspective; however we remain bullish on the outperformance of energy drinks over the beverage category.




Key Considerations for the Industry

The FDA has left the door open for the amount of caffeine that energy drink (ED) manufacturers may put in their products. We do not see this stance changing over the near to intermediate term.



  1. The effects of caffeine are difficult to measure and are subjective to the consumer based on such factors as age, sex, weight, and existing medical conditions.
  2. There is no accepted standard for measuring caffeine.
  3. The FDA does not wish to open a pandora’s box until there’s more scientific evidence on caffeine: if energy drinks caffeine levels are regulated, what’s next, coffee? This is a can of worms that we do not believe will be addressed by the FDA over the intermediate term.


Longer Term Risks

  • Over the longer-term, keep in mind that the FDA has put a limit on the amount of caffeine in soda drinks, 71mg. A similar limit could be placed on energy drinks over time. However, we expect the FDA to assess increased scientific studies on caffeine and energy drinks but ultimately be slow to act to issue a similar limit to soda drinks for energy drinks.
  •  As Dr. Kennedy suggested, we think there’s a higher probability that energy drinks are banned for sale to kids under 12 years of age.
  • A ban on the marketing of energy drinks targeted at kids.
  • We do not expect energy drinks to be move behind the counter.


MNST – Bearish Stock, Bullish Category

MNST is a stock that currently is set-up bearish across our quantitative intermediate term TREND price level of $57.56 (dancing below the level, up 3.5% since last Friday). 




We continue to believe that energy drinks will maintain their outperformance over the beverage market. That said, MNST fundamentals have significantly eroded over the past 5 quarters. Below we show MNST’s top and bottom line Bloomberg consensus estimates for reference.  We believe this slide in performance is attributable to both weak overall beverage trends, including poor weather conditions across recent quarterly results, and litigation concerns. On the last point, we think that the existing litigation is now largely behind the company, as are the associated media headlines, which should buoy sentiment. Our call with energy drink expert Dr. Kennedy only furthered our opinion that despite health concerns related to energy drinks, the FDA is not in a position to act over the near to intermediate term on caffeine content for the reasons we highlighted above.   Finally on a comp basis, you’ll notice much more favorable comparisons over the next four quarters, which could prove a tailwind.  We’ll be watching our quantitative levels to see if MNST can overcome its bearish intermediate term set-up before we consider it on the long side.


ENERGY DRINKS: RISK AHEAD? - z. mnst sales




-Matt Hedrick


In preparation for CCL FQ3 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • "Fleet-wide bookings during the last 11 weeks from the end of March covering the next three quarters are running higher year-over-year at higher prices."
    • "North American brands' bookings and pricing during this 11-week period are higher."
      • "Caribbean itinerary booking volumes in the last 11 weeks covering the next three quarters, are slightly lower year-over-year at slightly higher prices."
      • "Alaska bookings, again excluding Carnival, are significantly higher at lower prices."
      • "European itinerary bookings for North America brands, are slightly lower at nicely higher prices."
    • "EAA brands' bookings and pricing are also higher versus the prior year."
      • "European itinerary booking volumes, and that's approximately 50% of EAA capacity, are significantly higher at higher prices."
      • "Caribbean itinerary volumes for EAA brands, which are just under 10% of EAA capacity, are running behind last year, but also at nicely higher prices."


  • "Bookings and pricing over the last 11 weeks are both lower year-over-year in a high single-digits low double-digits range respectively." 
  • "On recent surveys, consumer perception of the brand has significantly improved since the incidents back in March, and we expect this trend to continue as confidence builds back in the brand. We will need to cycle through a full year before we begin to see positive pricing comparisons, which should begin in the second half of 2014."


  • "(Ex Carnival) On a fleet-wide basis at the present time, occupancies are slightly behind last year at slightly lower prices."
    • "(Ex Carnival) North American brand occupancies are slightly behind at flattish pricing, Alaska pricing is behind last year and North American brand, the European itinerary pricing, is higher versus last year."
      • "Carnival Cruise Lines' pricing is lower on all of its major itineraries versus last year."
    • "EAA brand occupancies for the third quarter, which are largely in Europe trades, are slightly behind last year at lower pricing.
      • "Occupancies for our Asian and Australian business are nicely higher year-over-year with slightly higher pricing. The performance of Costa in China is particularly encouraging given the doubling of its capacity in Asia during the quarter."


  • "On a fleet-wide basis, excluding Carnival, cumulative occupancies are slightly lower at slightly lower pricing."
    • "For North American brands, excluding Carnival again, occupancies are lower at higher prices."
      • "Carnival Cruise Lines' occupancies for the fourth quarter are also lower at slightly higher prices."
    • "For EAA brands, occupancies are flattish year-over-year at lower prices."
      • "Costa brand occupancies for the fourth quarter are nicely higher at lower prices...This is the first time during the last several quarters that Costa has been ahead of the closer-in booking curve this early in the booking process. We read this as a very positive sign are expecting Costa to have a nice increase in revenue yields in the fourth quarter."

1Q 2014 TRENDS

  • "On a fleet-wide basis, and this includes Carnival, occupancies are lower year-over-year at higher prices. North American brands' occupancies, again including Carnival, are lower year-over-year at nicely higher prices. EAA brands' occupancies are also lower at slightly higher prices."


  • "A major challenge in Europe right now is the weakened economies, especially in Italy and Spain."
  • "Northern Europe product did have a significant capacity increase this year relative to the Med, and we do not expect that to recur in 2014."


  • "So beginning in the second half of the year, we are planning to increase marketing spend across all North American brands and expect this to continue into 2014."
  • "We had talked about the vessel enhancements being a multiple year process. So there will be some of that in 2014 as well."


  • "There are some incremental operating expenses relating to the scrubbers, but there really isn't anything significant in the way of fuel consumption changes." 


  • "Even though our Northern European brands the yields are going down, the yields in P&O Cruises and AIDA are still some of the highest in our fleet. They're performing incredibly well."

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