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Buffett's Fed

This note was originally published at 8am on September 20, 2013 for Hedgeye subscribers.

“The Fed is the greatest hedge fund in history.”

-Warren Buffett

 

That’s what Buffett told students at Georgetown University yesterday. He was trumpeting “how much money” the Fed makes: “it’s generating $80 billion or $90 billion a year probably… and that wasn’t the case a few years back.”

 

Now isn’t that just fantastic. One of the greatest financial minds in US history is now marketing a political message that is about as anti Benjamin Franklin as it gets. Anti-savings that is. Where in God’s good name do you think these said “profits” come from?

 

They come out of American savings accounts. Even the Fed itself (St. Louis Fed) reminds us that the “growth rate of real GDP has been higher on average when the personal savings rate is rising than when it is falling (Gilder, pg 72).” The Founding Fathers wanted our children to respect their piggy banks, not some un-elected money printer clipping our hard earned coins.

 

Back to the Global Macro Grind

 

As George Gilder goes on to absolutely nail this topic in his new book, Knowledge and Power, “the entrepreneur is the savior of the system because he capitalizes himself. He is his own most important capital… socialists believe their mission is to seize capital for the masses…” (Gilder, pg 77)

 

That’s what Mr. Buffett should be marketing. It’s time to get our money out of the Fed’s hands and back into the hands of The People. We know how to generate returns. We’re the ones who are going to be doing the hiring when we make money. All the Fed’s “profits” do at this point is tax the American consumer. It’s called Down Dollar driven inflation. It’s regressive.

 

Moving on… where the rubber meets the road here is in terms of the purchasing power of your hard earned currency. While I was disgusted with Bernanke’s decision to debauch the Dollar again this week, that doesn’t mean he’s going to win this war for good. In the last 24 hours, both the data (economic gravity) and Mr. Market are fighting back:

  1. US Dollar Index is up +0.2% this morning to $80.41 (holding long-term TAIL risk support of $79.11)
  2. Gold and Silver are down -1% and -2.4%, respectively (both are still bearish TREND and TAIL in our model)
  3. Oil (Brent) failed to breakout above our immediate-term TRADE resistance line of $110.94/barrel

Economic data? Yes, as in the stuff Bernanke has un-objectively ignored since almost every high-frequency US economic data series we follow started to accelerated in July.

  1. JOBS: non-seasonally adjusted rolling US Jobless claims hit yet another YTD low (-16.4% y/y) yesterday!
  2. ORDERS: the Philly Fed’s “New Order” component ripped a +21 SEP vs +5 in AUG
  3. HOUSING: US Existing Home Sales hit a 6-month high yesterday

Now most Fed apologists (which are mostly those who get paid by A) Government Power and/or B) Down Dollar) will whine about the impact of #RatesRising on the “housing’s recovery” instead of focusing on what really drives housing demand – confidence.

 

Although US Savings are at generational lows, US Net Worth is currently tracking at an all-time high. We’d argue that’s been largely driven by real (inflation adjusted) #GrowthAccelerating more so than anything else. US Home Prices up +12.4% y/y obviously helps, but the demand for housing won’t be impacted until the 30-yr mortgage rate blows through 6% (it’s at 3.79% today, get over it).

 

In other words, the greatest threat to US growth recovering is the government intervening in the economic cycle. There has never been a sustained US economic recovery that didn’t coincide with:

 

1.       Strengthening US Dollar

2.       Rising US Interest Rates

 

Why doesn’t every discussion about the Fed start and end with that?

 

While Buffett might love the impact Bernanke has on his P&L (fat net interest margins are driven by marking the short-end of the curve at 0% - that pays insurance companies (Berkshire) in size), I’d like to remind him that the “greatest hedge fund manager in history” is also the only un-elected central planner in US history to attempt to ban the economic cycle.

 

What is an economic cycle?

 

$USD/Interest Rates Higher --> Energy/Commodities/Inflation lower --> Real Consumption Growth Higher  --> Pro-Growth Equities Higher

 

With all due respect Mr. Buffett, why don’t you and your pal, Mr. President, want the rest of us “middle classers” to have that?

 

Sadly, there are very few leaders in Washington who have my back on this. That’s one of the reasons why I have the highest CASH position in the Hedgeye Asset Allocation Model since July 23rd. I don’t trust this rally to all-time highs anymore.

 

The biggest thing Bernanke lost this week was whatever was left of the trust I had in someone at the Fed doing the right thing. The timing was perfect. And he chose politics instead. If growth slows from here, Gold help him. Because history won’t.

 

Our immediate-term Risk Ranges (we have 12 of them in our Daily Risk Range product) are now:

 

UST 10yr Yield 2.70-2.81%

SPX 1709-1730

VIX 12.91-14.62

USD 80.20-81.25

Brent 107.62-110.94

Gold 1346-1398

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Buffett's Fed - Chart of the Day

 

Buffett's Fed - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 4, 2013


As we look at today's setup for the S&P 500, the range is 15 points or 0.46% downside to 1671 and 0.44% upside to 1686.                                                   

                                                                            

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.31 from 2.30
  • VIX closed at 17.67 1 day percent change of 6.45%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Fed’s Fisher speaks on economy in Little Rock, Ark.
  • 9:15am: Fed’s Dudley to speak at New York Fed conference
  • 9:30am: Fed’s Stein to speak at repo conference in New York
  • 12:30pm: Fed’s Lacker to speak at conference in Baltimore
  • 1pm: Baker Hughes rig count
  • 1:45pm: Fed’s Kocherlakota speaks in Minn.

GOVERNMENT:

    • Fourth day of partial govt shutdown over budget impasse
    • Labor Dept said it won’t release employment data for Sept. because of shutdown; alternative date for report, usually released on first Friday of each month, hasn’t been scheduled

WHAT TO WATCH:

  • Twitter makes IPO filing public with implied $12.8b value
  • Twitter to be Goldman Sachs’s top U.S. technology IPO as lead
  • Twitter sends different message than Facebook in IPO filing
  • Boehner seeks Republican unity on debt-limit amid shutdown
  • Obama cancels Asia summit trip to try to bring end to shutdown
  • Fink, Gross see zero chance of U.S. debt default amid standoff
  • Fed hampered by dearth of data as officials weigh tapering QE
  • JPMorgan’s Dimon said to relinquish chairman title at bank unit
  • Microsoft said to discuss Windows for HTC Android phones
  • Anadarko, Exxon curb Gulf output amid storm evacuations
  • Rule that fragmented trading worth reviewing, SEC official says
  • Switzerland’s Finma looking into possible manipulation of FX
  • BOJ refrains from more stimulus as business confidence rises
  • Facebook’s Instagram to start advertising amid push for revenue
  • Samsung’s smartphone array drives record profit as HTC stumbles
  • Shutdown, IMF, APEC Meetings, Nobels: Wk Ahead Oct. 5-12

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Indonesia Challenges LME in Bid to Set Global Benchmark for Tin
  • Gold Traders Bullish a Third Week on U.S. Stalemate: Commodities
  • WTI Crude Heads for Weekly Gain as U.S. Seen Avoiding Default
  • Gold Swings in London as Investors Weigh U.S. Shutdown, Debt
  • Itochu Uses Paul Smith Plus Bananas to Beat Commodity Rivals
  • Copper Rises, Paring First Weekly Drop in Three: LME Preview
  • Rubber Marks Worst Week Since May as U.S. Impasse Boosts Yen
  • Gold May Test 2013 Low on Head and Shoulders: Technical Analysis
  • Freak Grape-Destroying Hail Crushes Burgundy Winemakers’ Dreams
  • Norilsk Nickel Plans $10B Capex by 2018 to Boost Metals Output
  • LNG Record Looms as Asian Winter Sparks Spree: Energy Markets
  • Mexican Sun Lures Cash to Solar as Panel Prices Plunge: Energy
  • SGX Suspends Blumont, LionGold, Asiasons After Shares Plunge
  • Copper Heads for First Decline in Three Weeks on U.S. Shutdown

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 


THE M3: GGR MARKET SHARES

THE MACAU METRO MONITOR, OCTOBER 4, 2013

 

 

SJM HAS BIGGEST SLICE OF SEPTEMBER'S CASINO MARKET Macau Business

SJM led the competition for casino gross gaming revenue in September with 25%.  Sands China Ltd kept the second-largest share of the market at 22%.  Galaxy Entertainment Group Ltd had 19% and MPEL had 14%.  WYNN had 11% and MGM had 10%.

 

 


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Beware of Burning Bucks

Client Talking Points

YEN

So you know your country has a serious credibility problem when the Yen looks stronger than your own currency. Unreal. USD/YEN continues to break down through our 97.35 TREND support. 98.23 is the new resistance now. The Nikkei was down hard on that this week.

OIL

There was basically nothing going on in the Middle East this week. No big headlines. Nothing. But #DownDollar on reckless "Sky Is Falling!" fear-mongering from Treasury Secretary Jack Lew about US Debt Default burned the buck. It also pushed Brent Oil back above TAIL risk line of 108.61 to 109.23 here. That's not good. It's called a #tax on consumers. Bad for growth.

ITALY

Take a look at Italy. It is up +1.1% this morning for the MIB Index. That gives the Italians the nod as one of the best stock markets of the week. Government saving people from government? That there is an epic market catalyst, I guess. We play the cards we're dealt here at Hedgeye. The Global Government Gong Show.

Asset Allocation

CASH 53% US EQUITIES 14%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 15%

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

Fascinating to watch a US President who doesn't get markets try to scare "folks" with market rhetoric @KeithMcCullough

QUOTE OF THE DAY

I am not a product of my circumstances. I am a product of my decisions. - Stephen Covey

STAT OF THE DAY

Twitter's just released IPO documents suggest a valuation of $12.8 billion for the microblogging service, underscoring the seven-year rise of a still unprofitable company that has helped revolutionize how people share information. Twitter is seeking to raise $1 billion and has pegged the fair value of its common stock at $20.62 a share. There are 620 million shares outstanding. (Bloomberg)



Collision Course

“Life is a series of collisions with the future; it is not the sum of what we have been, but what we yearn to be.”

-Jose Ortega y Gasset

 

Yesterday we (Keith and I) held a conference call with former Speaker of the House Newt Gingrich.   We invited him to join us for a call because, frankly, he and former President Bill Clinton were the last two politicians to shut down the Federal Government, so he better than anyone understands the strategy of what is currently occurring in Washington, D.C.  Even though he is an admitted conservative Republican, the call was both insightful and objective.

 

A key point that Gingrich raised is that a government shutdown is not as abnormal as it is being hyped and, in fact, may be a safeguard practice intended by the founding fathers.   Certainly, government employees will be furloughed and people’s lives will be interrupted, but as the former Speaker pointed out, this has happened many times in U.S. history.  In fact, it happened 12 times while Tip O’Neill was Speaker of the House.  Overall, there have been 18 government shutdowns in U.S. history, including the current one.

 

Not surprisingly, most government shutdowns have been very short lived.   In fact, the longest shutdown was 21 days in 1995 – 1996.  The shortest government shutdown lasted only one day.  In the Chart of the Day, we look at the length of every government shutdown over time.  As the chart shows, the average government shutdown lasted 6.5 days.

 

Naturally, when we pressed Gingrich on how long he thought this shutdown would last, being the astute student of history he is, he answered 3 days to 3 weeks (which is what history shows).  His view is that neither side has anything to gain by making this protracted.  His caveat, though, was that there are currently no negotiations occurring as President Obama is unwilling to cede anything at all on the Affordable Care Act.  According to Gingrich, while he and Clinton would go at each other in the press, and certainly had their differences, they would grind out solutions at the negotiating table.

 

The current set of actors are both polarized and talking matters personally, which is much different than the mid-1990s.  There has never been much cross talk or cooperation between Boehner-Pelosi or McConnell-Reid, and it is seemingly only getting worse in this time of “crisis.”  This unwillingness to negotiate and compromise is only exacerbated by the fact that neither President Obama, nor Speaker Boehner, have any concerns of getting reelected, so they are willing to expend personal approval for what they perceive as their party’s fundamental beliefs.

 

On the last point, disapproval is definitely mounting.  As it relates to the President, his most recent approval polls are as follows:

  • Gallup – Approve 44, Disapprove 50 -> Disprove +6;
  • Rasmussen – Approve 47, Disapprove 51 -> Disapprove +4; and
  • The Economist – Approve 43, Disapprove 53 -> Disapprove +10.

Not great numbers for Obama to be sure, but the approval numbers for Congress are even worse.  According to the most recent Economist poll, a full 74% of Americans disprove of the job Congress is doing.  Clearly, our elected officials are on a collision course with the next midterm election in which the polls turn to votes.  If any of them yearn to be re-elected, they have a lot of work to do over the next year to gain back America’s trust.

 

Coming back to the government shutdown, if the politicians in Washington have any acumen, they will resolve their differences over the next few weeks before the fear mongering on the debt ceiling begins to accelerate.  The stock market has been weak due to the dysfunction in Washington, but if amateur hour continues as the debt ceiling looms, risk assets are likely to be sold even more aggressively.

 

The White House is actually starting to use the debt ceiling as a bargaining chip and the Treasury Department released a report yesterday that outlined the potential macroeconomic effects of debt ceiling brinkmanship.  According to a preview released by the Treasury Department:

 

“The report states that a default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, and U.S. interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse.  By looking at the disruptions to financial markets that ensued in 2011, the report examines a variety of economic indicators – including consumer and small business confidence, stock price volatility, credit risk spreads, and mortgage spreads – through which a similar episode might harm the economic expansion.“

 

In as much as the economy doesn’t need brinkmanship over a debt ceiling, it also doesn’t need fear mongering from the Secretary of Treasury . . . but I digress.  Ironically enough, the fiscal outlook of the U.S. has actually been improving, so in theory the rating agencies should be upgrading their outlook on U.S. debt and not considering downgrades due to partisanship in the nation’s capital.

 

Next week, we will be releasing our quarterly themes and this focus on the dysfunction in Washington will be front and center as we update our views on the U.S. economy and outlook for the U.S. dollar.  An emerging conclusion is that Europe is starting to get relatively more interesting, which is supported quantitatively by the recent move in the Euro.

 

As you head into the weekend, we’ll leave you with a quote from Gingrich:

 

“What is the primary purpose of political leader? To build a majority.  If voters care about parking lots, then talk about parking lots.”

 

Sadly, none of our leaders, whether it be in Congress, the White House, Treasury Department, or Federal Reserve, know much about building a majority as of a late.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.59-2.65%

SPX 1

USD 79.82-80.35

Euro 1.34-1.36

Brent 108.61-109.98

Gold 1

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Collision Course	 - Shutdown

Collision Course	 - Virtual Portfolio


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