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“What people fail to realize is that we spend ~70% of the time at record highs in the equity market.”

-Anonymous Seasoned Investor


Keith and I picked up that gem in a recent meeting with a client out in San Francisco. Truly a savvy investor, this gentleman belongs to the increasingly rare camp of investors that has managed market risk across multiple decades and economic cycles.


Regarding the aforementioned quote, he dropped that line in a discussion about the pervasive lack of enthusiasm for 2013’s non-consensus equity market rally, specifically in response to our conjecture that baggage from the hard times of 2008-09 is broadly preventing investors from buying into the sustainability of said rally.


While I believe he was merely throwing a number out there to make a [wise] point, the reality is that he’s actually not that far off as it relates to the assertion he was trying to make:

  • Being worried about allocating capital to the equity market at/near its all-time high is hardly as big of a deal as the average investor – fully loaded with 2000-02 and 2008-09 baggage – would have you believe.
  • Over the past 30Y, the S&P 500 has traded within 5% of its [then] all-time high 43.8% of the time.
  • Over that same duration, only 26% of the time has the index traded 20% below its [then] all-time high.

Oddly enough, when looking at aggregated fund flow and securities market allocation trends, it seems that investors are still positioned for yet another blow-up in the equity market, when, in reality, it’s the inevitable unwinding of Bernanke’s bond bubble they should be most concerned about.


Per Jonathan Casteleyn, the newest member of our highly-regarded financials team:

  • Per the most recent data (2008-11 period), pension fund allocations to stocks is at an all-time low of 44%, while their allocations to bonds is at an all-time high of 37%. That ratio was 52% to 33% in the 1984-94 period, 64% to 27% in the 1995-00 period and 60% to 28% in the 2001-07 period.
  • From the start of 2008 through the most recent data (JUL ’13), bond mutual funds have seen a cumulative $1.09T of inflows, or 17% of starting AUM. This compares to a -$441B outflow from equity mutual funds, or -7% of starting AUM.
  • At $38T outstanding across the various categories, bonds represent 68% of the total US securities market (equities and debt). That compares to a 20Y average of 64% and a balanced ratio of 50/50 in 1999. Reversion to the mean implies a greater than $2T outflow from bonds into stocks over the long term.

Regarding that last point, we get a lot of pushback from fixed income managers that bonds funds don’t necessarily need to see outflows for the equity funds to receive inflows, citing record “cash on the sidelines”.


Indeed, un-invested cash in money market mutual funds, credit balances in margin accounts and deposit and currency assets on household balance sheets currently totals ~$12.4T, which is just off of all-time highs. As a percentage of the securities market, however, it hovers just above all-time lows (23% vs. a record low of 22% in 1999 and a record high of 32% in 2009).


If in 1999 someone thought the aggregate investment community was going to take its liquidity ratio down to new all-time lows in order to continue financing a bubble in stocks or even to take up its gross exposure by simply increasing its allocations to bonds, boy, were they sorely mistaken. Making that argument in defense of fixed income right now is equally off base, in our opinion.


In summary, we continue to believe there is a compelling, long-term fund flow case to be made in favor of the equity market in lieu of the bond market. 


Not from every price, however…


We need to see the US Dollar Index recapture its TREND line of $81.35 for us to believe that tapering is an intermediate-term event, rather than one that is far off in the distant realm of “potentially never”.


Simply put, as long as a collection of fear-mongering doves dominate the domestic monetary policy debate, the probability of a Japan-like, no-growth economic scenario will remain heightened.


Besides a natural monetary policy response to economic gravity, what else would get investors excited about investing for growth in lieu of safety?


Corporate America would be a good place to start. My, how they have been conspicuously absent from this recovery!



  • Record cash on their balance sheets ($1.8T per the latest data);
  • A near-record ratio of liquid assets to short-term liabilities (47.3%; 1.8 standard deviations above the 30Y mean);
  • An effective tax rate of 19.9% that is near all-time lows (-1.6 standard deviations below the 30Y mean);
  • An estimated $700B in interest savings since 2009 that can be specifically attributed to QE*; and
  • Profits that have grown +34.7% since 2007…

… Corporations have reduced employee headcount by -2.9% since 2007 and grown nominal CapEx by a measly +0.6% on a trailing 5Y CAGR basis – a growth rate that is just above a generational low.


Regarding the former point on corporate, QE-derived interest savings, $700B is enough to employ 9.6M workers for 1Y, assuming a $51k median income (per the Census Bureau) that represents 70% of all-in employee compensation costs (per the BLS), effectively taking up the median annual comp to $72.9k. To put that in context, there have been only 6.8M net hires since 2009 per the seasonally-adjusted nonfarm payrolls numbers.


Obviously that’s nothing more than a hypothetical analysis meant to draw attention to the fact that QE to-date has been little more than an overt transfer of wealth to Corporate America and the rest of the top-10% that owns the lion’s share of financial wealth in the this country.


It’s time both parties said, “thank you” by putting capital to work (corporations) and allocating capital back to pro-growth assets (investors).


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.57-2.74%


VIX 12.95-14.98

USD 79.99-81.35

Yen 98.02-99.17

Brent 107.40-110.61


Keep your head on a swivel,


Darius Dale

Senior Analyst


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NKE: Adidas Has Got To Hate These Guys

Takeaway: Nike is making ailing US retailers as well as its global competitors (aka Adidas) look downright silly.

What’s there to say about Nike’s quarter? We’re surrounded left and right by weakness in US retail, and yet Nike comes out and prints a quarter of Champions.


NKE printed top line growth of 8%, and an acceleration in futures to +10%, with a nice balance of 7% growth in units, and 3% increase in price. We saw +120bp improvement in gross margins, which was far ahead of our above-consensus estimate – as pricing initiatives are being met with very little resistance, and raw materials costs are coming in below plan. SG&A was flat for the quarter, which is largely due to comparisons against event spending vs last year. But still, the growth algorithm is inarguable…sales +8%, gross profit +11%, and EBIT +40%. EPS came in at $0.86, well ahead of our estimate of $0.82 and the Street at $0.78. Inventory looked great as well, growing 6% -- below the rate of sales for the 5th quarter in a row.


You might say that Nike naturally sidesteps the US retail malaise due to the fact that it is a global company. But then why did Adidas – its closest global competitor that has a nearly identical scope, reach and mix outside of the United States – put out an announcement on September 20 taking down expectations for the quarter and the year due to weak sales globally, particularly Russia (which Nike highlighted as a strength this quarter), and golf (this was also weak for Nike, to be fair). This juxtaposition simply highlights how well Nike is managed relative to its peers.


We’re taking up our estimate to $3.25 for the year (20% EPS growth). We think that Nike is being conservative with its expectation for only 50bps of improvement in gross margins for the year, and although we’ll start to see more normalized levels of SG&A spending, the reality is that a high-single-digit growth rate in sales with 100bp+ in gross margin improvement is nothing to shake a stick at. Mid-high teens EPS growth on top of 25% ROIC makes Nike every bit worthy of its 20 forward multiple (and then some). Nike’s still a core holding any way we cut it.


We’ll return with a more thorough deep dive after Nike’s analyst meeting in two weeks. 

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Ask Yourself 5 Simple Questions

“Always my soul hungered for less than it had.”

-T.E. Lawrence


Here are some risk management questions to consider:

  1. Will the supposed leaders of this country allow an un-elected man to keep devaluing America’s Currency?
  2. Will Ben Bernanke and Janet Yellen be allowed to impose a perpetual depression on American Savers?
  3. Will @FederalReserve’s latest “communication tool” be to drive uncertainty, locking in a YTD VIX low?
  4. Will the all-time high for the US stock market (SPX 1725) be another Bernanke Bubble top?
  5. Will there ever be a bull case America believes in that doesn’t include a #StrongDollar and real growth?

Ask Yourself 5 Simple Questions - ben1

I for one am Hungering For Less government intervention in our currency and bond markets. I’m hungering for a life that doesn’t include having to wake up worrying about what some sub-regional-anti-dog-eat-dog-federal-reserve-vice-president says on CNBC next.


I’m hungering for what has always reflected the strength and character of any nation – confidence in both the currency and resolve of its people to be the change born out of crisis.


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Takeaway: Strong claims data will beget strong NFP numbers between now and year end. A detailed analysis of this morning's Claims & GDP data below.

The strength in the domestic labor market remains impressive, to say the least. 


The 4-week rolling average in both the non-seasonally adjusted and seasonally adjusted Initial Jobless Claims series continued to accelerate in the latest week.  The strengthening continued despite the true up in the data stemming from technology upgrades in CA and NV that had positively impacted the figures over the last few weeks. 


As it relates to next week's payroll data, bloomberg currently has consensus estimates for nonfarm payrolls marked at 175K.  This compares with 169K for august and 3-month and 6-month averages of 148K and 160K, respectively. 


With strength in Initial claims accelerating over the last month and the seasonal distortion in the data now shifting to a tailwind, we think the balance of risk is to the upside vs expectations, as they sit currently, over the next few months.   


Below is the breakdown of this morning's claims data, along with a detailed analysis of the historical relationship between Claims and Nonfarm Payrolls, from the Hedgeye Financials team.  If you would like to setup a call with Josh or Jonathan or trial their research, please contact 






Should We Care about the Tail or the Dog?

We would make two points with respect to this morning's labor market data. 


First, the data is exceptionally strong. For perspective, SA rolling initial jobless claims are now at levels last seen in April 1999 and January 2006. Recollect the market environment in both those periods. Consider the chart below.




Second, since the market seems obsessed with the NFP report that will come out next Friday, here are a couple thoughts on how claims do/don't relate to NFP.


a) The first chart below looks at the time series data back to the start of 1999. Rolling initial claims are in red on the left axis while private payrolls are in blue on the right axis and are inverted to make the relationship more apparent visually. We think that the visual makes it quite obvious that there is a relationship between these two series.


b) The second chart below shows the same data but on a scatterplot. The RSQ is somewhat low at 0.528, but nevertheless the relationship is still quite clear, we think. The blue series is monthly data from 1999 to Present, while the green box is the most recent data for August 2013. Just by coincidence, the most recent data pair was almost exactly on the pin of the regression line. This month's claims data, for reference, would suggest private payrolls of 195k for September, by the way. Unfortunately, the standard error is significant. It is too large to have much conviction in the accuracy of the estimate. 


c) The final point worth making is that these two data series are cointegrated. The best definition I could find online for cointegration is the following: "The old man and the dog are joined by one of those leashes that has the cord rolled up inside the handle on a spring. Individually, the dog and the man are each on a random walk.   They cannot wander too far from one another because of the leash.  We say that the random processes describing their paths are cointegrated." - Link. We ran an ADF test (augmented dickey fuller) to see whether claims and NFP are, in fact, cointegrated and the p-value was 0.038. In other words, there is a 3.8% chance they are not cointegrated, and a 96.2% they are. Cointegration matters because it means that as claims go, eventually private NFP will go, just as the man with the leash will ultimately determine where the dog on the leash ends up.







The Data

Prior to revision, initial jobless claims fell 4k to 305k from 309k WoW, as the prior week's number was revised up by 1k to 310k.


The headline (unrevised) number shows claims were lower by 5k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.75k WoW to 308k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -17.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -16.2%








2Q13 GDP:  Final 2Q13 GDP largely a non-event.  A review of the highlights below:


Net Exports:  the upward revision to the advance GDP estimate (advance estimate was 1.7 vs the 2.5 prelim/final)) was driven primarily by the positive revision to net exports.  


Generally, we view GDP upside stemming from the balance of external trade as equivocal from an analytical perspective.  Relative import declines are positive from an accounting convention perspective but, from a macro perspective, import growth is generally associated with positive economic growth. 


While debt financed consumer (end) consumption of imports could be viewed negatively, an increase in capital equipment and raw material imports is supportive of domestic production and ultimately a net positive for national income. So long as the rise in imports didn’t come at the expense of resource utilization domestically, it’s constructive for domestic economic activity. 


Consumption:  Growth in Consumption was down sequentially in 2Q13, decelerating on a QoQ basis and providing a smaller positive contribution to GDP on the quarter. 


Given the soft, real disposable income growth observed thus far in 3Q13 (due to the combination of furloughing and continued job loss at the federal level and ongoing, muted wage inflation broadly) and the flat savings rate, were not expecting material acceleration in consumer spending in the very near term.  


Weak Dollar policy out of the fed and the prospective flow through to commodity inflation presents another headwind to an acceleration in consumption growth from here.     


Domestic Demand:  Real Final Sales (GDP ex-Inventory Change), Gross Domestic Purchases (GDP including imports, excluding exports) & Real Final Sales to Domestic Purchasers (perhaps the cleanest read on total domestic demand as it measures GDP including imports but excluding both exports and Inventory change) all accelerated strongly sequentially.


Investment:  Growth in Private investment was revised lower by 70bps in the 2nd revision, but still very strong for the quarter at +9.2%.   


Government:  Government expenditure growth remained negative on the quarter but was less of a drag than in 1Q13.  Government spending grew -0.4% in 2Q (vs -4.2% in 1Q), contributing -0.07% to GDP (vs -0.82 in 1Q).


Inflation:  The GDP Price Index and Core PCE inflation were revised lower with both coming in at 0.6%.  With Core PCE being the Fed’s preferred read on inflationary pressures, the disinflation currently prevailing remains supportive of the committee’s dovish policy lean.    





Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


Christian B. Drake



McCullough: Where I Stand Now

Takeaway: We are less sanguine on the market and macro economic picture.

The Bernanke Fed's decision not to taper throws a monkey wrench into the markets and economy. We are consequently less sanguine on the overall macro picture going forward.


McCullough: Where I Stand Now - monkey


Some Additional Thoughts

  • This is the first 2013 US stock market “correction” that I will not buy
  • Bernanke has confused the entire growth picture
  • Expectations of the Fed getting out of the way were critical to American confidence and growth prospects
  • Bernanke's gravity bending experiment is killing confidence
  • US Dollar is starting to look like hell again
  • All-time highs in growth vs slow growth stocks may be in as well
  • Still thinking year-to-date low for Fear (VIX) is probably in
  • We remain short the MLP Kinder Morgan (KMP) in #RealTimeAlerts.

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