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Dollar, Bonds & Fear

Client Talking Points

US DOLLAR

This is key: Both the US Dollar Index and the USD vs YEN are trading at critical lines of support ($79.21 is the long-term TAIL risk line for US Dollar Index and USD/YEN TREND support is 97.71). So, which way do we go from here? It's gravity (Friday jobs report) vs government now (Bernanke/Congress). It ought to get interesting. 

UST 10YR

The bond market is ignoring the government gong show and shutdown noise and looking forward (as usual) to the jobs report. If 2.55% TREND support on the 10-year holds (2.65% and #RatesRising this morning) and that jobs report is a big one, look for big time volatility in bonds to remain.

VIX

Front month fear is now officially back above my immediate-term TRADE breakout line of 14.64. So I’m watching that as closely as I am 1686 support (now resistance) in the S&P 500. Since the Bernanke Fed has successfully confused the entire market on the taper, this upcoming jobs report really matters this time. I will let Mr. Market tell me where to go next.

Asset Allocation

CASH 50% US EQUITIES 16%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 16%

Top Long Ideas

Company Ticker Sector Duration
WWW

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.

HCA

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.

TROW

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

TWEET OF THE DAY

So is the next market catalyst Congress savings us from themselves, again? @KeithMcCullough

QUOTE OF THE DAY

The best minds are not in government. If any were, business would steal them away. -Ronald Reagan 

STAT OF THE DAY

$300,000,000: A partial shutdown of the federal government would cost the U.S. at least $300 million a day in lost economic output at the start, according to IHS Inc. While that is a small fraction of the country’s $15.7 trillion economy, the daily impact of a shutdown is likely to accelerate if it continues as it depresses confidence and spending by businesses and consumers. (Bloomberg)


October 1, 2013

October 1, 2013 - DTR

 

BULLISH TRENDS

October 1, 2013 - 10yr

October 1, 2013 - spx

October 1, 2013 - dax

October 1, 2013 - nik

October 1, 2013 - euro

 

BEARISH TRENDS

October 1, 2013 - VIX

October 1, 2013 - dxy

October 1, 2013 - yen

October 1, 2013 - oil

October 1, 2013 - natgas
October 1, 2013 - gold

October 1, 2013 - copper


BACCARAT BLUES

Looks can be deceiving. Fundamental incongruity with MGM's stock move?

 

  • Despite the headline 20% growth in Strip revenues and 56% in Baccarat revenues (due to high hold) in August, Baccarat volumes remain a concern
  • Remember, throughout the downturn, Baccarat volume outperformed and kept Vegas barely afloat
  • Baccarat volumes have fallen 5 straight months YoY, which hasn’t happened since April 2003.  Operators we spoke to failed to supply any good answers.
  • We are becoming increasingly concerned that Strip fundamentals are lagging MGM’s stock move (we’ve been on the right side of that trade).  Slot volumes (still the most important metric) remain challenged and if this recent Baccarat trend is sustainable, investors may start scratching their head about MGM’s 76% YTD move.

BACCARAT BLUES - ss


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The Hierarchy

This note was originally published at 8am on September 17, 2013 for Hedgeye subscribers.

“The great thing about fact based decision is that they over rule the hierarchy.”

-Jeff Bezos


Jeff Bezos knows a thing or two about making decisions.  In 1994 after making a cross country drive from New York to Seattle, he made the decision to write up a business plan.  To undertake this cross country drive, he made a decision to leave a “well-paying” job.   The little company that Bezos was developing a business plan for was Amazon.com and the rest, as they say, is history.

 

At the time, Bezos combined two facts that helped him overcome the establishment.  The first was that the internet was growing in leaps and bounds.  The second fact was that the U.S. Supreme Court had ruled (in Quill Corp V. North Dakota) that online retailers would not have to collect sales taxes in states where they lacked a physical presence.

 

This series of decisions paid off handsomely for Bezos as he is now worth an estimated $25.2 billion.   Meanwhile his company Amazon.com has a market capitalization of more than $135 billion and generates more than $65 billion in annual revenues.  Frankly, it kind of makes me want to quit my job and go for a drive!

 

Former Harvard President Larry Summers made a big decision late Sunday to withdraw his name from consideration to replace current Federal Reserve Chairman Ben Bernanke.  Now technically speaking, the fact that five Democrats intended to vote against him in committee kind of forced his hand, but nonetheless a decision was made.

 

In the short run, Mr. Market viewed this development as somewhat positive as stocks were up broadly with the SP500 up 0.57%.  (Strangely, the bell weather master limited partnership, Kinder Morgan Partner (KMP), underperformed and was down -1.50%.) President Obama then chose to come out and spoil the Wall Street party as Obama indicated he will not negotiate an extension of the U.S. debt ceiling as part of the budget fight. 

 

Slight digression, yes the debt ceiling debate is looming again.  As Yogi Berra said, this is déjà vu all over again.  You may recall, in 2011 Congress raised the debt ceiling to $16.7 trillion, an increase of over $2 trillion.  Currently, based on projections from the Treasury department, the federal government could hit the debt ceiling as soon as mid-October.

 

In the chart of the day, we highlight a chart from the Bipartisan Policy Center that shows that the debt ceiling is likely to be breached to between October 18th to November 5th.   Technically speaking, the United States hit its debt limit on May 19th, but as my colleague Christian Drake has written about, via a number of extraordinary measures, the ceiling has been extended, but these measures will run out at some point in the time frame noted above at which point the federal government will only have enough tax revenue to cover about 68% of its bills.

 

Incidentally, and for those that don’t have their calendars in front of them, the “X-date” is just over a month away.  And just think, most investors are worried about who is going to be the next Chairman / Chairperson of the Federal Reserve!  Given the uncertainty around the direction of policy, a looming fiscal crisis, and the fact that U.S. equities have performed quite well in the year-to-date, it should be no surprise that some savvy investors like Stan Druckenmiller are indicating they are largely underinvested.

 

We certainly get the risks, but one point that has and will continue to benefit equities, is bond outflows.  Since May we have seen $116 billion fixed income fund outflows, which is the largest absolute bond outflow in history.

 

Interestingly though, as our Financials team pointed out yesterday,  as a percentage of beginning fixed income assets-under-management, the current 2013 draw down is the smallest in history on a percentage basis. The 2013 running outflow has been just 2.9% of outstanding bond funds, well below the past outflows in 2003-2004 where 5.0% of outstanding bond funds were redeemed and the 14% of bond funds that were drawn down in the 1994-1995 outflow.  So while there are certainly risks looking for equities, the continuation of bond outflows will be a meaningful tailwind. 

 

Nonetheless, many of the large investors we speak with remain focused, and rightfully so, on the direction of leadership at the Fed.  Given this focus, I thought I’d highlight a few fun facts about the Fed:

 

1) The greatest long term period of economic growth in the United States was between the Civil War and 1913 when there was no Fed.

 

2) Prior to the creation of the Federal Reserve, the estimated rate of inflation in the United States was 0.5% and it is   estimated to be at 3.5% in the ensuing century.

 

3) The permanent income tax was introduced in the same year as the Federal Reserve.

 

4) In 1913, Congress promised that if the Federal Reserve Act was passed it would eliminate the business cycle.

 

5) The value of the U.S. dollar has declined, by some estimates by more than 95% since the Fed was created.

 

6) There have been 10 recessions since 1950 (arguably many Fed induced).

 

I borrowed some of these points above from a blog called End of the American dream and, as we touched up on in the past, it kind of begs the question, as Bezos would say, as to whether the best fact based decision is to overrule the Federal Reserve hierarchy in its entirety.  Based on the points above, ending the Fed wouldn’t be the worst decision the Federal Government ever made.

 

Our immediate-term Macro Risk Ranges are now as follows:

 

UST 10yr Yield 2.80-2.98%  

SPX 1675-1709 

VIX 13.33-14.98 

USD 80.89-81.75  

Euro 1.32-1.34 

Gold 1301-1361 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Hierarchy - Chart of the Day

The Hierarchy - VP

 

 



The Biggest Loser

“Get comfortable with being uncomfortable.”

-Jillian Michaels

 

That’s a varsity quote from one of the original trainers on NBC’s “The Biggest Loser.” To a degree, Jillian Michaels typifies the attitude of my generation of entrepreneurs in America. She’s a 39 year old self-made business woman. She didn’t get anything handed to her in life. She bartended her way through college, sucked it up, and lived the American dream.

 

What is the American dream? Is it a bunch of big political and media losers getting paid to perpetuate fear and crisis on cable TV? Or is it the polar opposite of that? Bernanke, Boehner, and Obama can’t shut us down. No, no, no ladies and gentlemen. Today we are going to do what we do at the top of every risk management morning – we are going to grind.

 

Grinding in the arena of business life has been celebrated by this country for generations. In 1925, President Calvin Coolidge reminded the American Society of Newspaper Editors that “the chief business of the American people is business” (The History of Money, pg 169). So that’s the headline coming out of this 2.0 Financial Media upstart from Stamford, CT this morning. Rise Above that.

 

Back to the Global Macro Grind

 

What’s fascinating about watching both the US stock market futures and the bond market this morning is that neither of them seem to care whatsoever about Old Media’s politicized fear-mongering. Mr. Market is shutting the media’s message down.

 

That shouldn’t surprise you. As newspaper editors and television producers look backward, markets look forward. Up next is the US Employment Report for the month of September.

 

September (and the 3rd quarter in general) was one of the best quarters for US growth expectations in half a decade:

  1. US Growth Stocks hit all-time highs (for SEP Industrials (XLI) +5.4% and Consumer Discretionary (XLY) +5.1%)
  2. US (slow growth) Bonds and Utility stocks hit their YTD lows (for SEP Utilities (XLU) only +0.18%)
  3. US Equity Volatility (VIX) hit YTD lows as well

Then, mid-September, along came Bernanke, Boehner, and Obama …. and:

  1. US Growth Stocks started making a series of lower highs (down for 7 of the last 8 days)
  2. US (slow growth) Bonds and Utilities outperformed everything growth
  3. US Equity Volatility (VIX) ripped a +26% move to the upside in less than 2 weeks

Congrats to the Fed, Democrat, and Republican parties. It’s a tie – you all get a Hedgeye sticker for America’s biggest losers!

 

Looking forward to the US employment report on Friday:

  1. US Growth Stocks may very well put in yet another higher-low (SP500 = 1660 TREND support)
  2. US Treasuries appear to be making another lower-high (10yr Yield = 2.55% TREND support)
  3. And front-month fear (VIX) is making yet another lower-YTD-high as well (VIX = 18.98 TREND resistance)

What say you Mr. Market about all of that?

 

I say it’s government versus gravity!

 

That would be economic gravity of course. As in the stuff that Bernanke has been trying to bend. And while bending gravity appears to be quite innovative to the Central-Market-Planner-in-Chief-of-anti-dog-eat-dog USA, that doesn’t mean it’s going to work.

 

So play this out – the US jobs report on Friday has a binary outcome:

  1. It’s a moon-shot to the upside and bond yields rip (again) to the upside
  2. It’s in line to a “miss” and Bernanke and his old-boys from anti-gravity-smoothing headquarters say “we nailed it”

Which of the two will it be?

 

I’m proud to say that I have absolutely no idea. That’s why the Hedgeye Asset Allocation Model has a 50% Cash position and in our #RealTimeAlerts I only have 5 LONGS, and 4 SHORTS. Getting out of the way of this political gong show was a risk managed decision.

 

I’m very comfortable grinding out another business building day. I’m uncomfortable with risking what’s been a great year for us on a government report that could go either way.

 

UST 10yr Yield 2.59-2.68%

SPX 1

Nikkei 142

VIX 14.64-16.99

USD 80.02-80.77

Brent 107.08-108.98

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Biggest Loser - Chart of the Day

 

The Biggest Loser - Virtual Portfolio


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