Buy the Dip! Not.

Client Talking Points


We've said it before here at Hedgeye, and we'll say it again: Respect is earned, not allocated. Over in Germany, Angela Merkel doesn’t have a bunch of Fed heads running around like chickens with their heads cut off making conflicting speeches to manic media people now does she? The DAX “correction” looked nothing like that in the S&P 500. Both DAX, the FTSE and Nikkei are all looking better now than S&P 500. Why not buy them instead?


With the two greatest threats to Americans at the pump (Syria and Ben Bernanke) finally out of the headline news this morning, Brent is snapping my long-term TAIL risk line of $108.57. That is new. It's also a very good thing on the margin. We need it.


Mr. Bernanke thinks that down rates is a good thing. Neither I nor the stock market agree. Falling rates is a leading indicator for #GrowthSlowing, and so is a Yield Spread (10-year minus 2-year) that just compressed to +236 basis points wide from 250 (bearish for the Financials yesterday – good for slow growth Utilities) #sad

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


When God created earth, he was thinking Bill Dudley would set gravity's rules @federalreserve



“You should never wink at a girl in the dark. Our communications policy is a little off–we should work harder to refine it.”  - Dallas Fed President Richard Fisher


This week alone, 13 companies are set to begin trading on the Nasdaq and NYSE -- which would be the busiest week for initial public offerings since November 2007. If all those companies make it to the market, that will bring this year's IPO total to 153. At least 200 companies are now expected to debut this year, according to Renaissance Capital. That would be the most since 2007.

September 24, 2013

September 24, 2013 - dtr



September 24, 2013 - 10yr

September 24, 2013 - spx

September 24, 2013 - dax

September 24, 2013 - nik

September 24, 2013 - euro

September 24, 2013 - natgas 



September 24, 2013 - VIX

September 24, 2013 - dxy

September 24, 2013 - yen

September 24, 2013 - oil
September 24, 2013 - gold

September 24, 2013 - copper


TODAY’S S&P 500 SET-UP – September 24, 2013

As we look at today's setup for the S&P 500, the range is 49 points or 1.22% downside to 1681 and 1.65% upside to 1730.           













  • YIELD CURVE: 2.36 from 2.37
  • VIX  closed at 14.31 1 day percent change of 9.07%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:55am: Johnson/Redbook weekly sales
  • 9am: S&P/CS Home Price Ix 20 City M/m, July, est. 0.8%
  • 9am: S&P/CS Y/y, July, est. 12.4% (prior 12.07%)
  • 9am: S&P/CS Home Price Index, July, est. 162.69 (pr 159.54)
  • 9am: FHFA House Price Index M/m, July, est 0.8% (prior 0.7%)
  • 9:30am: Fed’s Pianalto speaks in Chicago
  • 10am: Richmond Fed Manuf Index, Sept., est. 11 (prior 14)
  • 10am: Conference Board Consumer Conf Index, Sept., est. 80
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 11:30am: U.S. to sell 4W bills
  • 1pm: U.S. to sell $33b 2Y notes
  • 1pm: Fed’s George speaks in Chicago
  • 4:30pm: API weekly oil inventories


    • Obama to speak at UN 9:30am, Clinton Global Initiative 4pm
    • Insurance industry executives discuss Medicare funding, expansion of Medicaid, Oct. 1 debut of insurance markets at conf. sponsored by AHIP, 9am
    • U.S. Postal Service’s board of governors begin 2-day closed meeting to discuss increasing prices
    • Obama enlists Bill Clinton in campaigning for health-care law


  • Chrysler files for IPO as Fiat seeks deal to merge cos.
  • Financing for Blackberry bid by Fairfax questioned
  • Dell said to work w/AlixPartners on post-LBO turnaround
  • KKR, Sycamore may bid on Jones Group as soon as this week: NYP
  • South Korea fails to choose winner in $7.7b fighter deal
  • JPMorgan Chase said to be sued over Libor w/12 other banks
  • Telefonica reaches deal to increase stake in Telecom Italia
  • NYSE said to plan rule change for voiding U.S. options orders
  • Riverstone seeks up to $1.5b in IPO for energy investment
  • Danone’s Dumex to release bribery probe results this month
  • Anadarko says it didn’t cause spill-related investor losses
  • Airlines face carbon-reduction verdict on $708b industry
  • Microsoft adopts plan to retain executives during CEO change
  • Wal-Mart gender-bias suit class claims dismissed by U.S. judge
  • Monte Paschi seen boosting cost-cut goals to meet EU demands
  • Sony film marketing chief Weinstock said to exit role
  • Spain’s Val said to hire Jefferies to find buyer for Ono stake
  • German Sept. business confidence missed ests.


    • AAR (AIR) 4pm, $0.45
    • Ascena Retail Group (ASNA) 4:02pm, $0.21
    • CarMax (KMX) 7:35am, $0.57
    • Carnival (CCL) 9:15am, $1.29
    • Copart (CPRT) Aft-mkt, $0.40 - Preview
    • KB Home (KBH) 8:30am, $0.21 - Preview
    • Lennar (LEN) 6am, $0.45 - Preview
    • Neogen (NEOG) 8:45am, $0.32


  • Indonesia Vows to Stick With Tin Trade Policy as Prices Jump
  • Palm-Oil Stockpiles Expanding Add to Record Supply: Commodities
  • Copper Drops for Third Day on Concern About U.S. Budget Clash
  • WTI Crude Drops to Six-Week Low as Global Supply Concern Eases
  • Soybeans Advance From One-Month Low as U.S. Shipments Increase
  • Gold Falls in London as Investors Weigh Fed, Physical Demand
  • China Grabs First-Ever Global Steel Majority: Chart of the Day
  • China to Double Gas Use in Five Years to 2015 in Pollution Drive
  • Beef Imports by China Seen Surging While U.S. Remains Locked Out
  • Rubber Drops Most in Two Months as Crude Oil Prices Fall
  • Crude Stockpiles Fall to 18-Month Low in Survey: Energy Markets
  • Shippers Poised to Return to Profit as Cargoes Grow 10%: Freight
  • Arabica Seen Declining 9% by End of October: Technical Analysis
  • Rebar Falls as Li Says China Has Chosen Steady Monetary Policy


























The Hedgeye Macro Team













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Bernanke's Lure

“It has exerted its pull on the West for a thousand years.”                                                                                          

-Scott Anderson                                   


That’s what Scott Anderson called the “lure of the East” in a fascinating new book I just started studying about the history of the Middle East called Lawrence in Arabia (2013).


“That lure brought wave after wave of Christian Crusaders to the Near East over a three-hundred year span in the Middle Ages. More recently, it brought a conquering French general with pharaonic fantasies named Napoleon… Europe’s greatest archaeologists in the 1830s… hordes of Western oil barons… and con men to the shores of the Caspian Sea in the 1870s.” (pg 15)


While 1,000 years is a long time, the lure of central planners clipping coins and/or devaluing the currency of The People has been in motion for at least 2x that. “In 64 A.D., in a naïve attempt to deceive the populace, Nero decreased the silver content in the coins and made silver and gold coins slightly smaller” (The History of Money, pg 52). Bernanke hopes no one has read that history.


Back to the Global Macro Grind


What is it, precisely, that gave both the Roman and Ottoman Empires the audacity to plunder the purchasing power of their people? After 200 years of operating as an independent bank, what made the British Empire so soft that it felt it had to socialize (nationalize) the Bank of England in 1946? What was the US “Free-Market” Empire and why have we empowered the Fed to change it?


My apologies in advance for thinking this morning. If you disregard the vacuum of history in which Bernanke thinks (1930s) and  contextualize the moment that his Fed is in (within the construct of long-term history which will ultimately judge Bernanke when he is long gone), it’s getting scary again. But you already know that – and the sad thing is that some of his Fed heads do too.


Yesterday, Dallas Fed Head (Fisher) basically admitted two things:

  1. The current White House Administration has politicized the US Federal Reserve
  2. By not doing what they led the market to believe what they’d do (taper), the Fed is losing credibility

Check. check.


I think most people who aren’t paid not to “get” it understand this now. If you don’t understand the history of un-elected politicians devaluing currencies, you have some reading to do. Self-education is the best long-term path to not becoming a lemming.


I’m not that smart. I think most people who have seen my SAT scores get that too. But Mr. Market is a very smart cookie, and what I tend to get (on a lag) is what he (or she) is telling me to get. I don’t wake up every morning trying to bend economic gravity.


Bernanke thinks he can “smooth” gravity, cycles, etc. He’s telling the entire bond, currency, and stock markets they are wrong. #Wow, bro. So let’s rewind the tapes and go to the score – what have markets done since Bernanke didn’t taper?

  1. US Dollar went straight down (now bearish TREND after being bullish for the better part of the last 9-10 months)
  2. US Interest Rates went straight down (still bullish TREND, but lost the immediate-term TRADE momentum line of 2.80% 10yr)
  3. US Growth Stocks stopped going up; slow-growth Utilities stopped going down

Now isn’t that last part perfect. Great job Ben. Instead of US growth expectations accelerating, now they are slowing again.


This is the first 2013 US stock market “correction” that I will not buy because Bernanke has decided that the opposite of what I want is what he wants. To review, what I want is A) what was happening and B) what every American should want:


1.       #StrongDollar

2.       #RatesRising

3.       #GrowthAccelerating


To be fair, there are a lot of people who are in the business of slow-growth (Gold, Bond, MLP, etc.) investing who have a pre-determined path as to what they want (more money to manage). But that’s not what The People want.


You don’t have to go back 2,000 years to get this either:

  1. 1983-89 US Growth > 4% GDP with #StrongDollar (Reagan’s avg = $115.25 USD) and Down Oil ($16.53/barrel avg)
  2. 1993-99 US Growth > 4% GDP with #StrongDollar (Clinton’s avg = $97.89 USD) and Down Oil ($19.69/barrel avg)

And maybe Hillary is smart enough to get what Obama doesn’t – and maybe that’s the only way out of this mess:

  1. Obama’s average USD (US Dollar Index) is the lowest in Presidential history at $79.52
  2. Obama’s average Oil price (Brent Oil) is the highest in Presidential history at $102.01/barrel

But that’s more than a few years away and sadly, at some point, someone in this country is going to realize that empowering both Putin and Middle Eastern kings via a Down Dollar, Up Oil policy is no different than doing the same via an un-elected Federal Reserve.


There is no doubt in my mind that the Fed is exerting its misplaced fear-mongering pull on the President. The lure is also to get you, The People, to fear the alternative (“if rates rise, housing will collapse”) when in reality it’s the government policy itself that is luring us away from the free-market system that gave America its empire to begin with.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.59-2.80%


VIX 12.93-14.98

USD 80.01-80.98

Euro 1.34-1.36

Brent 107.03-109.13


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bernanke's Lure - Chart of the Day


Bernanke's Lure - Virtual Portfolio


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



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