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Neutral: SP500 Levels, Refreshed

Takeaway: Why buy a market that was overbought for the wrong reasons (Fed randomly devaluing the Dollar) when it’s not yet oversold?

This note was originally published September 24, 2013 at 10:42 in Macro



I don’t know about you, but ever since Bernanke moved the goal posts again, I have no idea what to do. Whenever that happens, I take down both my gross and net exposure.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1725
  2. Immediate-term TRADE support = 1682
  3. Intermediate-term TREND support = 1655


In other words, why buy a market that was overbought for the wrong reasons (Fed randomly devaluing the Dollar) when it’s not yet oversold? You could have bought all your wanted with the SP500 at 1630 in AUG – and we did.


Not here – not now. No thanks, Ben.



Keith R. McCullough
Chief Executive Officer


Neutral: SP500 Levels, Refreshed - muck

Twitter: Are You Following the SEC?

Takeaway: We urge you to follow SEC Investor Education, if only to see how the Commission is positioning itself.

While it continues to not make headlines, the SEC has put out some important alerts over Twitter under Investor Education (@SEC_Investor_Ed).  For reasons we can only speculate on (investor apathy? willingness to be bamboozled?) the Commission’s education twitter handle only has 37,000 followers – far less than the number of individual investors who are routinely harmed by market fraud in the course of a year. 


And since we follow them, and we know most other compliance professionals do as well, we speculate that the number of actual retail investors looking to the Agency for information remains pitifully small.


Twitter: Are You Following the SEC? - twit2


This is a mistake. 


The SEC is coming off a bad patch, to put it mildly.  But it appears to be actually moving towards much more robust action on the behalf of market integrity.  The SEC’s Twitter stream tells you what they are working on right now, tells you what the Commission thinks is important right now. 


Earlier today, the SEC tweeted an alert titled “Federal Regulators Issue Guidance On Reporting Financial Abuse Of Older Adults” saying “recent studies suggest that financial exploitation is the most common form of elder abuse and that only a small fraction of incidents is reported.” 


The most common form of abuse.  That’s pretty striking. 


Let’s not sugar coat this: we have all been lulled into a sense of helplessness by generations of academic economists insisting that People Always Act In Their Own Self Interest.  The big problem with that proposition is that most people have no idea what their actual interests are.  Instead, people generally act on impulse.  Even for those who give some thought to their actions, “planning” usually boils down to “we’ll set up a diversified portfolio… a little of this… a little of that…”  You actually paid someone to do that with your money?  C’mon, America. Time to get serious.


The combination of fear about not having set enough aside for retirement, plus trepidation over being left to one’s own devices – plus, as the Alert points out, “cognitive decline” which leads to poorer than average decision making – makes older folks sitting ducks for scam artists.


This brief Alert says “employees of financial institutions may be able to spot irregular transactions or behavior that signals financial abuse,” and that these employees “can play a key role in preventing and detecting elder financial exploitation by reporting suspicious activities.”  We think this could be a significant opening wedge for the Commission to start holding financial firms responsible for elder fraud committed by third parties.


Fraudsters don’t always register with the financial authorities.  But stockbrokers and advisers do.  The umbrella regulatory organization for the financial services industry, FINRA, issued guidance for its members in 2010.  If you are concerned that you, or someone you know, may be vulnerable, you may want to start by seeing what FINRA wants its members to do by way of guarding against elder fraud. 


FINRA’s head of investor education testified last year before the Senate Special Committee on Aging that the Authority considers protection of elderly investors a high priority.  In light of today’s Alert, we wouldn’t be surprised to see a new FINRA release in the coming months reminding members of their duty to provide special care in their dealings with the elderly.


But how can this help you – or your aging parents? 


FINRA has the authority to hold a broker responsible for activity in an investment account, even if the broker doesn’t manage the account.  Brokerage firms have a duty to ensure that transactions are Suitable for the individual customer, and investors who manage their own money have been able to recover losses if the firm was deemed not to have exercised due care by permitting them to trade excessively or to make unsuitable investments. 


One common form of fraud is for stock promoters to induce gullible investors to buy large blocks of worthless stocks.  These transactions are done as “unsolicited trades” in the victim’s brokerage account.  If they are unsuitable (almost always a sure bet), FINRA has the power to hold the brokerage firm liable, even if they had nothing to do with promoting the stock.


Consumer advocates have long complained that the deck is stacked overwhelmingly against the individual investor.  But note that today’s Twitter release represents regulatory guidance on behalf of seven federal agencies.  One of them is the new Consumer Financial Protection Bureau.  And at least two of the others – the SEC and the Comptroller of the Currency – have failed miserably in recent years and need to make headlines going forward.


Twitter: Are You Following the SEC? - twit1


We urge you to follow SEC Investor Education, if only to see how the Commission is positioning itself.  Many of us have a cynical view of the Commission.  But you get nothin’ for nothin’.  If you think your concerns are important, you need to make your voice heard.  The SEC routinely opens up new rule proposals for public comment, yet rules that have the potential to affect millions of private investors are often commented on overwhelmingly by major financial institutions – whose interests are often better served by the status quo than by proposed regulatory changes. 


The Commission can only respond to your concerns if it hears them.  Get with the program. 


By Moshe Silver


Moshe Silver is a Managing Director at Hedgeye Risk Management and author of Fixing a Broken Wall Street.

Sequestration 2014: What's the Impact Again?

Takeaway: The real economic impact of sequestration in 2014 will likely be equivocal. Positive growth will resume for the balance of the decade.

Knowing Is Half The Battle  - G.I. Joe


It’s been more than two years since the Budget Control Act (BCA 2011) was passed as a first step towards reigning in federal fiscal profligacy.  Subsequent legislation, principally the American Tax Payer Relief Act (ATRA 2012), modified the original provisions and adjusted the caps on discretionary budget authority.  


With the new fiscal year here and congressional cantankery again in crescendo, we thought it worthwhile to provide a cliff note review of the 2014 budget setup, with a focus on the projected impacts of sequestration specifically.   Unless you’ve followed the legislation closely, the details are probably fuzzy at this point and a superficial read of the headlines can be misleading in regards to both the magnitude and real economic impact of the legislated cuts.   


Garnering a clean read on what a fiscal policy actually proposes, how it’s being measured and scored and the mechanics of its implementation is probably more than half the battle in analyzing fiscal policy measures.  Below we offer a summary refresh on the details of sequestration and some clarity on the main points of confusion. 


TWO SETS OF CAPS:  There are currently two discrete sets of caps on discretionary spending in place that are independent of one another.  The Budget Control Act of 2011 placed a first set of caps on discretionary budgetary authority (see top set of numbers in table below).  Cuts legislated under sequestration are incremental to the BCA caps and work to further lower the total discretionary budget authority in each year through 2021 (middle set of numbers in CBO table below).


THE BUDGET CONTROL ACT:   The Budget Control Act (BCA), enacted in August 2011, put a cap on total federal discretionary spending with separate sub-caps on Defense and Non-Defense discretionary programs.  The caps were put in place for the fiscal years 2013-2021 with the goal of reducing projected deficit spending by $1.5T over that period (more on that in “Scoring Sequestration” below).


SEQUESTRATION:  The BCA created and charged the Joint Select Committee on Deficit Reduction (i.e. the “Supercommittee”) with finding deficit savings incremental to those achieved under the discretionary caps set forth in the BCA.  Specifically, it called for $984B in additional budget cuts, divided equally over the nine years spanning 2013-2021 ($109.4B per year, divided equally between Defense and Non-defense Discretionary).   Sequestration was the fall-back provision that automatically cut funding should the Supercommittee fail to reach agreement on an alternative source of deficit reduction.  The committee failed to reach an accord, thus triggering the Sequestration provision. 


BUDGET AUTHORITY vs. OUTLAYS:  The statutory caps on discretionary spending target Budget Authority.  Budget Authority represents the allocation of funds in a given year that an agency can use to make financial commitments.  Budget Authority, however, does not necessarily equal spending.  If an agency has excess funds or appropriations from prior years it can still spend those dollars – the effect being that total outlays could exceed total budget authority in a given year. 


SCORING THE SEQUESTRATION CUTS:  This point is simple but a key one to remember when evaluating the real economic impact of the “cuts”.  The often cited “Cuts” for a given year do not refer to incremental, year-over-year reductions in spending.  The cuts, as they are quantified and quoted, are relative to total projected spending under the 2010 funding path. 


To clarify, when congress was debating the Budget Control Act and the Simpson-Bowles deficit reduction committee was actively evaluating deficit reduction options, the latest available data was the official discretionary funding level for 2010 and the CBO’s forecast for discretionary spending over the 2012-2022 period.  In their baseline scenario, the CBO’s took the 2010 funding level for discretionary spending and inflation adjusted it to arrive at projected spending over the subsequent decade. 


To illustrate using 2014 as an example - the scheduled cut (as scored by the CBO/OMB and quoted in the press) for fiscal year 2014 is $109B.   This does not mean that discretionay outlays will be $109B less than last year – it means budget authority for 2014 will be $109B less than the CBO projected it would be back in 2010 based on the 2010 inflation adjusted spending path. 


EXTRA APPROPRIATIONS: Overseas Contingency Operations (i.e. war funding), Disaster relief, Emergency Designations and Program Integrity Funding all, despite being discretionary in nature, fall outside of the purview of the caps legislated under BCA.  Spending for these programs totaled $152.6B in fiscal 2013 according to the CBO (Here).  Total spending on these ‘adjustment’ items represents the chief means by which total spending could deviate from that legislated under the tight controls in place under the discretionary spending caps.  In fact, adjustments in 2013 increased total discretionary budget authority over the 2012 level. 


SEQUESTRATION MODIFICATIONS:   The American Tax Payer Relief Act (ATRA 2012), which served as the resolution to the fiscal cliff issue, modified the sequestration cuts for fiscal 2013 and 2014 legislated by BCA.  Specifically, it lowered the legislated cut for 2013 by $24B from $109B to $85B.  As an offset, ATRA lowered the 2014 cap by $8B (split evenly between defense and nondefense).  


It's worth noting that while the total cut was reduced for 2013, the final decision came in March, 5 months into the fiscal year - which, on an annualized basis, equates to ~$140B in cuts.  For any agency that hadn't already adjusted budget expectations, any adjustments had to be concentrated in order to stay below sequestration defined levels over the balance of the year.     


ABSOLUTE FUNDING WILL DECLINE IN 2014 BUT RISE THEREAFTER:  Total Discretionary Budget Authority is scheduled to decline $76B to $967B in fiscal 2014 from $1043B in FY2014.   From FY2015 to 2021, funding is scheduled to grow approx +2.5% per year.   


Sequestration 2014:  What's the Impact Again? - budget authority


So, unless congress reaches an accord on an alternate path to deficit reduction, total discretionary budget authority will decline by ~$76B in absolute term in 2014.  However, depending on the level of extra appropriations and the difference between actual outlays vs authorized funding, that negative difference could narrow or even turn positive. 


All-in, the real economic impact of sequestration in 2014 will probably be equivocal.  For the second half of the decade, discretionary budget authority (and presumably actual spending by extension) will resume positive growth. 


Christian B. Drake

Senior Analyst 




OMB Sequestration Preview Report for FY 2014 >> HERE

CBO Sequestration update Report (Aug 2013) >> HERE

CBPP – Sequestration, Clearing Up misunderstandings >> HERE

(BCA 2011) Budget Control Act of 2011 >> HERE

(ATRA 2012) America Taxpayer Relief Act of 2012 >> HERE


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Retail Sales: #Blah

Takeaway: Not a good start for Retail Sales data. Holiday hiring plans are both anemic and backward-looking.

Retail Sales: #Blah - ret1


It has not been a good week for Retail Sales data so far, as the ICSC year-over-year percentage change clocked in at +1.6%.


That matches the lowest reading since May.


While we traditionally see a strong sequential uptick in week 38, someone clearly forgot to tell the US consumer. Let’s see if the chilly start to autumn helps next week’s data. 


Retail Sales: #Blah - bri1

Retail Sales: #Blah - bri2


Editor's note: This is a brief excerpt from Hedgeye Research courtesy of Retail Sector Head Brian McGough. For more information on how you can begin receiving Hedgeye research, including "Investing Ideas" and "Real-Time Alerts" please click here

Stories on Hedgeye Radar Screen

Takeaway: Here's a quick look at some stories we're reading today.

Keith McCullough – CEO

Fisher Says White House Botched Fed Chairman Succession (via Bloomberg)

US consumer confidence dips (via Yahoo Finance)

Facebook, other banned sites to be open in China free trade zone (via Reuters)

Ex-FBI agent pleads guilty in national security leak (via BBC)


Stories on Hedgeye Radar Screen - sum1


Daryl Jones – Macro

Post Fed Hangover (via Bespoke)


Josh Steiner - Financials

Trader Lost $4M in Romney Bets (via NY Post)


Jonathan Casteleyn – Financials

Gundlach to Manage $450 Million for Prudential’s Jackson (via Bloomberg)

Applied Materials to Buy Tokyo Electron for $9.39 Billion (via Bloomberg)


Kevin Kaiser – Energy

Exclusive: Gulfport Energy ex-chairman received millions in free equity (via Reuters)

National Oilwell Varco (NOV) to Spin-Off Distribution Business (via StreetInsider)


Howard Penney – Restaurants

SEC Doesn't Like Noodles' 'Guests' (via Restaurant Finance Monitor)


Brian McGough – Retail

U.S. Retailers’ Holiday Hiring Seen Falling 6.9% (via Bloomberg)

Abercrombie & Fitch pays out $71,000 to settle lawsuits over hijabs (via The Guardian)

Kravis pushing to buy Jones Group (via NY Post)


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




  • WORSE:  While the quarter was a little better than expected, the outlook was disappointing.  1H 2014 yield guidance was substantially lower than what the Street was expecting as was Q4 EPS and yield guidance.  We continue to believe the ramifications from a tarnished Carnival brand have been underestimated.




  • WORSE:  North American brands' (ex Carnival) bookings volume for the next 3 quarters has been flat at higher prices in the last 12 weeks.
  • PREVIOUSLY:  "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."


  • WORSE:  While management states that the Carnival brand continues to recover, F4Q pricing declines are now trending in the double digits while 1H 2014 yield guidance was a bomb mainly due to Carnival - suggesting little improvement.
    • "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."


  • WORSE:  Lower than expected yields due to 'geopolitical events in the Eastern Med'.  Occupancy and pricing dropped across most ships.
    • "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

  • WORSE:  Ex-Carnival brands are not offsetting the bleeding from the Carnival brand by much, as revenue yield change for 1H 2014 is expected to be in the low single-digit decrease, similar to 2H 2013.
  • PREVIOUSLY:  "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."


  • MIXED:  CCL expects Costa's performance to strengthen over 2013 and throughout 2014.  Brand perception improved in Italy and France but political uncertainties continue to pressure the European markets.
    • "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."


  • SAME:  Carnival expects NCC ex fuel/impairments to be roughly similar to that seen in 2H 2013.  There will be more marketing activity, ship investments and onboard products such as food and entertainment.  Dry dock costs will be higher due to vessel enhancements. 
    • "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."

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