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Markets Mute Fear Mongrels

Client Talking Points


How did the United States' top creditors respond to Obama & Boehner fear-mongering “default” spew? Well, they both went up (China & Japan). China is actually up both days since the holiday week conclusion. It's bounced back and is now in positive territory year-to-date. We remain long China (new position) via the FXI exchange traded fund.


Most European Equity markets don’t care about the US fear-mongering either. The Eurostoxx600 is also up this morning. Over in Germany, the DAX is holding all lines of support. Meanwhile, Italy’s stock market is hitting a fresh year-to-date high post the USA smackdown to oversold. Bottom line: The global response to Washington is to put conflicted politicians on mute.


You would think the big Janet Yellen Fed news would be Dollar bearish. You would probably think the news would be Gold bullish too. Think again. It's certainly not the case this morning. That’s because the U.S. Dollar was oversold alongside S&P 500 into yesterday’s close and Gold continues to crash year-to-date.

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


On the road seeing clients in Boston today. I'll walk through why I like China and Germany better than US Equities



Fall seven times and stand up eight. –Japanese Proverb


The new $100 bill costs 12.5 cents to produce — a 60% increase over the 7.8 cents it cost to print the older version of the bill. The U.S. government has printed 3.5 billion of the new $100 bills, which it began delivering to financial institutions yesterday.

Getting Embarrassed

“You get embarrassed as a professional athlete.  There has to be accountability in our room.  That’s not acceptable.  Not even close.”

- Shane Doan


Last night I trekked out to the dilapidated Nassau Coliseum with a few colleagues to watch a National Hockey League game between the New York Islanders and the Phoenix Coyotes.  We worked to put a group together to buy the Coyotes and now own a piece of the team, so we had a bit of an emotional investment in the game.


The end result was a 6 – 1 trouncing of the Coyotes by the Islanders.   For those that play sports or are fans of sports teams, you will be, on some level, accustomed to losing.  It happens. It is part of the game.  But Coyotes’ Captain Shane Doan’s point from above is adroit  - if you lose you also have to be accountable.   No doubt old school Coyotes Coach Dave Tippet made sure of that in the locker room last night after the game.


Given the current dysfunction in Washington, the one thing that we can all smile about this morning is that the Founding Fathers actually built a high level of accountability into the system.  This is particularly true in the House of Representatives where elections occur every two years.  But how does this all end? Who gets held accountable? And when can we go back to focusing on research and not the soap opera of Washington D.C.?


In terms of the first question, this probably all ends with a whimper, rather than a bang, despite the manic intimations of the media or fear mongering politicians. Keith and I did a short clip on HedgeyeTV (yes, the crazy lads at Hedgeye built their own T.V. studio!) and if the credit default swaps of U.S. government debt are telling us anything, it is that there is no imminent risk of a credit default.


In the Chart of the Day, we highlight a more interesting trend related to U.S. creditworthiness, which is the long-term federal deficit-to-GDP chart.  The key takeaway from this chart is that the creditworthiness of the U.S. has actually been improving over the last three years based on this key metric.  (Incidentally, it shouldn’t surprise anyone that the lagging indicators called rating agencies downgraded U.S. debt basically at the bottom.)


Last week, we brought in former Speaker of the House Newt Gingrich to discuss how the government shutdown is likely to play out.  To summarize his view; it was that the Republicans push through some small reforms on the Affordable Care Act and likely come to some agreement on future tax reform or discretionary spending cuts with the White House.  Speaker Boehner’s rhetoric has shifted from focusing on Obamacare, to focusing on the idea of a negotiation, which certainly underscores this point.


Our Healthcare team is currently doing a poll that is asking people the simple question: “How will the government shutdown end?”  So far the results are as following:


- 2% - Shutdown ends, debt ceiling raised, Democrats make massive concessions

- 48% - Shutdown ends, debt ceiling raised, Republicans get very little in return

- 18% - Shutdown ends, debt ceiling raised, on concessions either side

- 18% - Shutdown continues, debt ceiling raised, on concessions either side

- 15% - Shutdown continues, debt ceiling raised, and the World Ends


So, there you have it.  Almost half of those polled agree that the likely outcome is that the shutdown is ended and debt ceiling is raised, but the Republicans get very little for their actions. 


The more interesting point is that almost 15% believe that the world could end (i.e. the U.S. has some form of a default).  So, if you are wondering why there is volatility in the markets currently, it is because of this not so small minority that are pricing in the end of the proverbial world trade.  In all likelihood, though, there is some form of resolution before the Oct. 17th deadline.


Incidentally, if you’d like to take the poll it can be found here: http://poll.fm/4ft5s


Shifting from policy makers to monetary policy, the writing appears to be on the wall this morning that President Obama intends to nominate Janet Yellen as the next chair of the Federal Reserve.  In the coming days, there will be many assessments of Yellen, but I thought this one from Justin Wolfers, an economist at the University of Maryland and friend of Yellen’s, was particularly interesting:


“If Yellen had been in charge of the Fed over the past few years, millions fewer would be jobless, and we would be less concerned about the danger of deflation. The point is that Yellen’s pragmatic reading of the macroeconomic tea leaves has led her to avoid the errors of her theory-bound colleagues who have seen the threat of inflation around every corner. Both hawks and doves should applaud this appointment.”


Translation: according to Wolfers, Yellen is a miracle worker.


The reality is that is not really her broad reputation among stock market operators.  Or those of us that operate in the real economy.  The great Julian Robertson of Tiger Management fame, and likely a proxy for what many astute money managers think, said on CNBC earlier this week that Yellen is, “way too easy money.” 


The broader implication of more easy money is a weaker dollar and a deceleration of economic growth.  Whether it be the yield spread compressing, short term treasuries nearing the zero bound, or oil breaking out to the upside, the implications of more, and perhaps accelerated easy money, is ultimately slower growth.  If that is the path our policy makers go down, it will be more embarrassing than just losing some hockey game.


Our immediate-term Risk Ranges are now as follows:


UST 10yr Yield 2.60-2.67%


VIX 18.98-20.64

USD 79.74-80.61

Brent 109.02-110.46

Gold 1


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Getting Embarrassed  - Deficit COD


Getting Embarrassed  - vp10 9

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.






Sands China Ltd properties recorded 1.5 million visitors in the first week of October, up 23% YoY.  Sands China executive vice-president of operations Gunther Hatt says the company’s properties were “near full capacity” for the week and its 9,000 hotel rooms were fully occupied from last Wednesday to Friday.


Golden Week tourist arrivals were up by 6.2% YoY.  From October 1 to Monday, 901,176 tourist arrivals were recorded by the police.  The Macau Government Tourist Office says mainland arrivals grew by 12.1% to more than 722,000 people during the week.


October 9, 2013

October 9, 2013 - dtr2



October 9, 2013 - 10yr

October 9, 2013 - dax

October 9, 2013 - nik

October 9, 2013 - VIX

October 9, 2013 - euro

October 9, 2013 - oil

October 9, 2013 - natgas



October 9, 2013 - spxA

October 9, 2013 - dxy

October 9, 2013 - gold

October 9, 2013 - copper


Mind Your Business

This note was originally published at 8am on September 25, 2013 for Hedgeye subscribers.

“Money, not morality, is the principle of commercial nations.”

-Thomas Jefferson


That’s the opening quote to chapter 7, “The Birth of The Dollar”, in Jack Weatherford’s economic history classic The History of Money. We study history so that we can attempt to contextualize the madness of the moment in which we are living. Watching Bernanke debauch the value of the American People’s money is obviously immoral – but who cares?


Morals? This isn’t about morals. This is about getting paid. And for political types, since the speech circuit pay-wheels have already been greased for life, you only get paid by politicians if you can spin. Storytelling that this recent 4-day drop in the US stock market is “all about Congress” is paramount to the unaccountable @FederalReserve’s fiction.


That’s the short-run. In the long run, most politically conflicted narratives are dead. We’re a long way removed from 1787 (1st issuance of coins in the United States) when “copper coins bore the motto “Mind Your Business” (Weatherford, pg 119).” But my business  of protecting against the loss of your capital to poorly timed policy decisions remains.


Back to the Global Macro Grind


My business adheres to a rule that Warren Buffett used to uphold as “Rule #1” of investing (before he went all chuckles @CNBC and pro government socialization of his P&L’s risk on us): “Don’t lose money.”


In order for we commoners who don’t get insider and government “preferred” investment terms to execute on this rule, we need to let Mr. Market tell us what to do next.


As of this morning, the most obvious of the new obvious in our Correlation Risk model is the US Dollar moving to an immediate-term correlation versus bond yields of almost 1.0 (US Dollar Index 3-week correlation to US 10yr Treasury Yield = +0.98).


What does that mean?

  1. Bernanke’s causal impact on the value of American Purchasing Power (US Dollar) is massive
  2. There’s an explicit link between US currency and bond yields in the face of policy information surprise
  3. When moving in tandem, US Dollars and Bond Yields are coincident (leading) US growth indicators

I realize that this isn’t the framework you are going to read from Morgan Stanley this morning. And that’s precisely why our contrarian bull case on US Growth was right this year. Consensus economists and market strategists don’t use our framework.


To review our (and world history’s) account of mapping economic gravity:

  1. When a country’s currency is rising alongside its country’s interest rates = #GrowthAccelerating signal
  2. When a country’s currency is falling alongside its country’s interest rates = #GrowthSlowing signal

To be clear, a signal can whip around and change direction more often than you can remain solvent trying to trade every move. But the intermediate-term TREND signals don’t lie nearly as often as the Fed’s forecasts do.


This is why we overlay our A) fundamental research with B) a quantitative risk management signal that is multi-duration and multi-factor. Since I never know what Mr. Market is going to start signaling as risk, I just need to wait and watch for trending signals.


Now some might say that doesn’t make sense because the trends can change. But that is precisely the power of the process. As policies, prices, correlations, etc. change - we do. The alternative strategy is dogmatic naval gazing about what “should” happen.


In summary, what’s “new” in our model as of the last week?

  1. US DOLLAR: our intermediate-term TREND line of $81.35 broke on Bernanke’s decision to break it
  2. US 10YR TREASURY YIELD: our immediate-term TRADE line of 2.79% broke; and TREND support of 2.55% is under attack

Since the #1 Style Factor leading market performance in 2013 YTD = LONG GROWTH, this very immediate-term information surprise to the market on both the US Dollar and Bond Yields matters, big time. Why? Because, unlike the Fed’s marked-to-model dogma of 0% interest rates on the short end of the curve, US growth expectations are marked-to-market.


One other way to consider Mr. Market’s current #GrowthSlowing message within this Down Dollar, Rates Down move was in yesterday’s US stock market sub-sector divergences. The Financials (XLF) led losers on the day (-0.6%). The why on that isn’t that complicated to follow – as long-term rates fall, the leading indicator for the Financials (Yield Spread) compresses.


Since Larry Summers was eliminated as a prospective Fed head (his policy would have been more hawkish = #StrongDollar, #RatesRising), the Yield Spread (10yr minus 2yr yield) has compressed by -8.5% to +229 basis points wide. That’s not a point of difference between Bernanke and my definition of morality; that’s just going to eat into the principle of profits.


Our immediate-term Risk Ranges are now as follows (we have 12 Global Macro ranges in our Daily Trading Range product too):


UST 10yr Yield 2.61-2.79%

SPX 1683-1704

Nikkei 14523-14844

VIX 12.95-14.98

USD 80.24-81.34

Gold 1291-1331


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Mind Your Business - Chart of the Day


Mind Your Business - Virtual Portfolio

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