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FLASHBACK: CAT-CALLING CAT

This note was originally published July 25, 2012 at 15:56 in Macro

CONCLUSION: We continue to expect that global economic growth will be skewed to the downside over the intermediate term – both relative to current readings and also relative to currently-elevated expectations. Moreover, we would view the inflationary impact of any incremental LSAP program out of the Federal Reserve as a negative shock to reported growth figures globally – particularly when considering how weak the world economy is currently.

 

THEMES AT PLAY: Growth Slowing’s Slope, Deflating the Inflation [of Bernanke’s Bubbles], and King Dollar via The Last War: Fed Fighting.

 

If you’ve been following our highly-differentiated Global Macro research process over the last four years, you’ll know that we rarely anchor on company forecasts for guidance on economic growth. At best, we use them to vet our internal analysis of said trends. The logic behind applying such a limited weight to corporate executive guidance in our process is primarily three-fold: 

  • Like traditional sell-side economists, corporate executives carry a persistent optimistic bias, which typically leaves them reacting to – rather than preparing for – economic downturns;
  • Like traditional sell-side economists, corporate executives tend to streamline current trends into perpetuity when forecasting, often limiting their ability to appropriately risk manage any increase in the probability of exogenous events; and
  • Ironically, both entities (sell-side economists and corporate executives) rely on each other’s work in true circular reference nature when developing their own “independent” forecasts. 

As previously mentioned, we do occasionally find opportunities to vet our existing conclusions with company results and/or guidance. In this example, we focus on Caterpillar Inc. (CAT), which just reported a positive 11.31% surprise in 2Q EPS ($2.54 vs. $2.28). CEO Doug Oberhelman was particularly pleased with the results (all-time highs in revenues ($17.374B) and profits ($2.54/share)), as indicated in the press release: 

  • Reaction to Quarter: “I am very pleased with Caterpillar's record-breaking performance in the second quarter.”
  • Operating Guidance: “We have narrowed the outlook range for sales and revenues and raised the outlook for profit.  The sales and revenues outlook range for 2012 is now $68 to $70 billion with profit of about $9.60 per share at the middle of the sales and revenues outlook range.  The previous outlook for sales and revenues was a range of $68 to $72 billion with profit of about $9.50 per share at the middle of the sales and revenues outlook range.”
  • Economic Guidance: "While we're expecting a record year in 2012, we understand the world is facing economic challenges, and if it becomes necessary, we are prepared to act quickly as we did in late 2008 and 2009.  While we're prepared, the good news is, this doesn't feel like 2008.  Interest rates are low, central banks are prepared to inject more liquidity if needed, and housing is coming off lows, not a peak, and seems to be improving… While we will not hesitate to act if we need to, we believe that actions needed for better world economic growth for the future have already begun… I am cautiously optimistic about the world economy in 2013, very positive on the long-term prospects for global growth and excited about the role Caterpillar will play in making that growth happen.” 

We on the Hedgeye Macro Team “feel” far less optimistic about their quarter (top line growth slowed; margins compressed) and the slope of global growth over the intermediate-term TREND. As the table below shows (sourced from our 3Q12 Macro Themes slide deck; email us for an updated copy), we remain well below consensus growth estimates for a number of key countries and economic blocs globally.

 

FLASHBACK: CAT-CALLING CAT - 2

 

FLASHBACK: CAT-CALLING CAT - 3

 

FLASHBACK: CAT-CALLING CAT - 1

 

Jumping back to CAT specifically, we offer the following analysis from our new Industrials ace, Jay Van Sciver, who recently launched coverage of that sector for Hedgeye with his hyper-contrarian bearish thesis on the airlines industry. To the extent you’d like to see more of his work and/or connect with Jay live, please email sales@hedgeye.com

  • “Despite the move up in CAT today, which we view as short covering driven, weak backlog trends support recent underperformance in the shares.
  • Backlogs declined for first time since 3Q 2009, as the company drew down backlogs in today’s “beat.” 
  • As shown below, months of backlog are highly correlated with CAT’s relative performance.
  • Implied orders (estimated as change in backlogs plus revenue) declined 3.0% y-o-y after posting 12.2% growth y-o-y in 1Q2012.  That is a significant deceleration.
  • Something has to give: orders will need to rebound, production will have to be cut, or backlogs will be drawn down.  The current macro data does not suggest a near-term order rebound to us.
  • CAT has been one of the primary beneficiaries of what we view as unsustainably high levels of resource capital investment.  Slowing activity in China is a risk to mining capital spending.
  • Though CAT has an excellent competitive position and a strong franchise, we believe that the shares are overvalued from a cyclically adjusted perspective. 
  • While the months of backlog is still relatively high, historically that has presented an exit opportunity.
  • Implied orders rates now trail revenue, as indicated by backlog declines.” 

FLASHBACK: CAT-CALLING CAT - 4

 

BAD CHINA

In looking at their results from my coverage purview (Asia and Latin America), we highlight a couple key negative comments on China that may be flying under the radar to some extent: 

  • “Construction sales declined in the Asia/Pacific region, where a large decrease in China more than offset increases in other Asia/Pacific countries.
  • “The Chinese government has accelerated policy easing, with its second consecutive interest rate cut in July 2012.  Infrastructure spending is running behind the government's target, and we expect the government will introduce supplemental investment programs.
  • Sales in China were also weak during the second quarter of 2012 and were well below the second quarter of 2011, which was a strong quarter for sales in China.” 
  • “As we began 2012, our expectations for sales in China were higher, and we built substantial new machine inventory in the first quarter to support what is usually a seasonally strong quarter.  First-quarter sales were lower than expected, and we ended the first quarter with higher inventory in China.  We developed and are executing a plan for an orderly reduction of China inventory that includes lower production, merchandising programs to improve sales and the export of machines from China to other parts of the world.”
  • We remain very positive on long-term industry growth in China and our strategy to grow our business there.  Our plans for the remainder of 2012 reflect an orderly ramp down of production that considers our entire supply chain in China.  Given the current low rate of sales and the production ramp down, it will likely take the rest of 2012 to reduce inventory to appropriate levels. 

We highlight the following red flags: 

  1. The large YoY decrease in sales to China “more than offset increases in other Asia/Pacific countries”, suggesting to us that A) demand for industrial machinery in China is outright contracting and B) China, being the economic behemoth that it has become is large enough to offset sales growth from the broader region;
  2. They, like many sell-side prognosticators (that may or may not service CAT from a banking/advisory perspective), expect China to “introduce supplemental investment programs” (i.e. fiscal stimulus and/or a state-directed lending program). We remain on the other side of this view with respect to the TRADE and TREND durations (see compendium on China below);
  3. Despite “remain[ing] very positive on long-term industry growth in China” they plan an “orderly ramp down of production” with respect to their “entire supply chain in China” though year-end in hopes of repackaging that product and delivering it to other parts of the world. It remains to be seen if the region can accelerate their demand for industrial equipment with Chinese growth continuing to slow. Given China’s growing role in the industrial supply chain as an end-consumer of raw materials, we’ll take the other side of that bet… 

All told, CAT’s results and guidance on China rhymes directly with what we’ve been saying for months now. Moreover, CAT is not the first major industrial company to come out and talk down their Chinese growth expectations in recent weeks:

 

Sany Heavy Industry Co., China’s biggest maker of excavators, lowered its sales forecast for the equipment as slowing economic growth and government curbs on property market sap demand. Excavator sales may increase 10 percent this year, slower than a previous target of 40 percent, Vice Chairman Xiang Wenbo said in a July 11 interview in Changsha, Hunan province, where the company is based. Sany will still outperform the industry, which may see a fall in demand, he said. 

-JUL 13 via Bloomberg Professional

 

We continue to see signs of slowing growth in Fixed Investment in China (46.2% of Chinese GDP), which being exposed by the accelerated decline in rebar prices, as indicated in the chart below.

 

FLASHBACK: CAT-CALLING CAT - 5

 

Moreover, we can’t stress enough our counter-consensus stance on the outlook for Chinese policy, in that we believe the State Council is no hurry to introduce a meaningful fiscal stimulus package or a large-scale state-directed lending spree over the intermediate term. In fact, we wouldn’t be surprised if they were inclined to tighten the screws on the property market further (pending a potential second-consecutive monthly acceleration in property prices here in JUL). Refer to the following notes for our extended thoughts on the Chinese economy at this critical juncture: 

  • CHINA’S INCREMENTAL GROWTH SLOWDOWN CONFIRMED (MAY 23): While Deflating the Inflation remains a bullish catalyst for the Chinese economy, the lag between this event and the turn in both the reported growth data and growth expectations may have just increased. As such, we are of the view that waiting and watching for clarity is the best strategy in the immediate term for China.
    • As an aside, China’s Shanghai Composite Index remains in a Bearish Formation and is down -9.6% since we put out this initial bearish piece on the Chinese economy in this latest cycle. That is far and away the largest decline throughout the region over that duration and is vastly underperforming the regional median gain of +0.5% (same duration).
  • CHINA’S RATE CUT IS LIKELY A BAD SIGN OF WHAT LIES AHEAD (JUN 7): We don’t see the early innings of this Chinese rate cut cycle as a signal to get bullish on China’s economy or equity market at the current juncture. Moreover, we do not find it prudent for investors to increase their asset allocation exposure to commodities here.
  • CHINESE GROWTH: STICKING TO THE CENTRAL PLAN (JUL 13): We maintain conviction in our view that Chinese economic growth is not poised to meaningfully inflect over the intermediate term. Furthermore, we can’t stress how much the late-year transition in leadership or the growing official realization that the 2008-09 stimulus package and central plan (i.e. state-directed lending) contributed heavily to a rapid and potentially unhealthy expansion in credit (+96.6% since the end of 2008) may slow Chinese policymakers’ fiscal/regulatory response [if any] to an incremental deterioration in economic growth. Remember, Chinese banks have yet to see a material deterioration in credit quality (the industry-wide NPL ratio is at a measly 0.9%), so it’s not unreasonable to believe that Chinese policymakers could be saving their “bullets” for a potentially more worthy cause than a purposefully-engineered slowdown in Real GDP growth to +10bps above their official 2012 “target” of +7.5% (announced in MAR).
  • PONDERING CHINESE GROWTH PART II (JUL 17): Contrary to consensus speculation, we are of the view that Chinese policymakers are likely not readying a stimulus package to be announced and administered over the intermediate term that would be substantial enough to meaningfully inflect the slope of Chinese economic growth. As such, it would be prudent to fade any incremental Chinese stimulus rallies for the time being. 

SLIPPERY SLOPE?

Taking a 30,000 foot view of our active macro themes, a bevy of key economic and financial market data points across the globe have brought forth renewed concerns about the slope of global growth. A few of the more noteworthy recent callouts include: 

  • The US Treasury 10s-2s spread, a historically reliable leading indicator for the slope of US economic growth, has narrowed in recent weeks to 119bps wide – the tightest spread since JAN ’08!
  • Chinese, Japanese, Hong Kong, Thai, and Vietnamese Export growth figures each slowed in JUN (to +11.3% YoY, -2.3% YoY, -4.8% YoY, -2.5% YoY and +15.2% YoY, respectively).
  • In the Eurozone, the composite Manufacturing PMI ticked down in JUN to 44.1 from 45.1 (a 3yr-low) and the composite ZEW Economic Expectations Index dropped to -22.3 (the lowest since JAN). 

FLASHBACK: CAT-CALLING CAT - 6

 

We could continue listing data points, but the point isn’t to belabor what has already been reported; rather, we continue to expect that global economic growth will be skewed to the downside over the intermediate term – both relative to current readings and also relative to currently-elevated expectations.

 

Moreover, we would view the inflationary impact of any incremental LSAP program out of the Federal Reserve as a negative shock to reported growth figures globally – particularly when considering how weak the world economy is currently. Catalysts on this front include: 

  • AUG 1: Federal Reserve FOMC Rate Decision;
  • AUG 23-25: The annual central bankers confab in Jackson Hole; and/or
  • SEP 13: Federal Reserve FOMC Rate Decision. 

We conclude this piece with how we started this note – highlighting CAT’s cheery guidance, which anchors heavily on aggressive exceptions that the world’s central planners can and will “save the day” in the near term. Coincidentally, their current outlook in on this topic rhymes a great deal with their mid-2008 outlook – the last time they were forecasting record full-year Revenues and EPS while accelerating CapEx on hopeful expectations of incremental Polices to Inflate

  • 2Q12 Press Release: “Brazil started easing monetary policy with lower interest rates in late 2011, and we are now seeing improvement in our business there.  China has started taking action, and we expect that further monetary easing and investment initiatives in China should help economic growth in late 2012 and 2013… It will likely take some time for the Eurozone to fix its problems, but we expect that monetary easing by the European Central Bank, a commitment to resolve debt issues and more focus on economic growth should help stabilize the situation and lead to better prospects in the future… Eventually, we expect the U.S. Federal Reserve will resume expanding its balance sheet…”
  • 2Q08 Press Release: “Eventually central banks [in developed countries] will return to cutting interest rates… Many developing countries are experiencing increased inflation, and some have tightened economic policies. However, most counties have moved cautiously, and policies remain expansive. We expect strength growth in construction to continue… Strong sales outside North America are being driven by solid economic growth in the developing world, continued investment in infrastructure throughout much of the world and commodity prices for metals, minerals and energy levels that encourage our customers to invest.” 

FLASHBACK: CAT-CALLING CAT - 7

 

The moral of this story is rather simple: don’t get caught offsides by buying into corporate hope.

 

Darius Dale

Senior Analyst


What's New Today in Retail (10/23)

Takeaway: Athletic sales still in good shape. AMZN takes up free-shipping minimum – risky bet. UA mgmt shuffle. MW buying Allen Edmonds = slam dunk.

EVENTS TO WATCH OVER THE NEXT 24 HOURS

 

SKX - Earnings Call: Wednesday 10/23 4:30 pm

CRI - Earnings Call: Thursday 10/24 8:30 am

UA - Earnings Call: Thursday 10/24 8:30 am

 

ECONOMIC DATA

 

Takeaway: While not the gangbusters rebound we saw last week, we're looking at a still-respectable 4.2% growth rate in top line for the athletic footwear space last week. This syncs with the rebound we saw in the ICSC numbers yesterday. Still the Nike, Jordan and UnderArmour show.

 

What's New Today in Retail (10/23) - chart1 10 23

What's New Today in Retail (10/23) - chart2 10 23

What's New Today in Retail (10/23) - chart3 10 23

What's New Today in Retail (10/23) - chart4 10 23

What's New Today in Retail (10/23) - chart5 10 23

 

COMPANY NEWS

 

MW - Men's Wearhouse Interested in Allen Edmonds

(http://online.wsj.com/news/articles/SB10001424052702303448104579151892364648738?mod=Business_newsreel_2)

 

  • "…[MW] is pursuing a possible purchase of dress-shoe maker Allen Edmonds Corp., according to people familiar with the matter…"
  • "It is unclear who else, if anyone, may be bidding for closely held Allen Edmonds, which could fetch a price in the low hundreds of millions of dollars, according to the people. A deal for the company, with Men's Wearhouse or someone else, could be reached next month, one of the people said."

 

Takeaway: This is absolutely perfectly in line with MW's push to elevate itself to become a house of higher-end men's brands. It also should add important context to why it thwarted JOSB's effort to acquire it -- simply put, MW thinks that it's worth more as a stand-alone company.

 

AMZN, EBAY - Amazon Raises Free-Shipping Minimum to $35; eBay to Expand Same-Day Delivery

(http://online.wsj.com/news/articles/SB10001424052702303672404579152054283012952?mod=ITP_marketplace_0)

 

  • "EBay...ramped up its rivalry with Amazon.com...over same-day delivery with an acquisition and plans to reach 25 markets by next year. Meanwhile, Amazon raised the minimum order size required for most U.S. customers to qualify for free shipping."
  • "Amazon's increase in the minimum purchase for free delivery seemed tied to an effort to push users to sign up for Amazon Prime, which offers two-day delivery for $79 a year. It raised the minimum to $35, from $25; Amazon said it was the first such change in over a decade. An Amazon spokesman declined additional comment."
  • "Even at $35, Amazon's threshold for free shipping is lower than several important rivals. Wal-Mart last week announced free shipping on online orders of $50 or more. Previously Wal-Mart had offered free shipping on select items or for individual promotions."
  • "Target...offers free shipping for orders of any size placed on Target.com that are paid for using the retailers store-branded credit or debit card. Otherwise, shoppers need to spend $50 on eligible items for free shipping."
  • "…Barnes & Noble...offers free shipping to customers who spend $25 or more. A spokesman declined to comment."

 

Takeaway: This is a bold move by AMZN -- one that needs to pay off. Simply put, AMZN needs to meaningfully boost its Prime customer base to offset the risk of being less competitive from a shipping perspective. Keep in mind that it's not just the fee associated with Prime, but rather Prime customers have an extremely high purchase rate because of 1) the ease of shopping via '1-click', and 2) the perception that shipping is free.

 

UA - Under Armour Names Kip Fulks President of Product and Henry Stafford President of North America 

(http://www.sportsonesource.com/news/article_home.asp?Prod=1&section=1&id=48438)

 

  • "Kip Fulks has added president of product to his current responsibilities as chief operating officer, while Henry Stafford is now serving as president of North America."
  • "Further enhancing its senior executive team, Under Armour also announced the addition of Susie McCabe as senior vice president, global retail and Jason LaRose as senior vice president, global e-commerce."
  • "McCabe's extensive management experience includes over 16 years with Ralph Lauren Corporation... In her new role,  McCabe will be responsible for Under Armour's brand house and factory house stores across the US and for the company's global retail strategy."
  • "LaRose joins Under Armour from Express, where he served as senior vice president of e-commerce….LaRose will oversee the global standard for all online consumer experiences and will be responsible for driving web business and strategies to further connect with the brand's core consumer."

 

Takeaway: Interesting how soon this comes so soon after Nike's realignment. Nonetheless, Fulks has proved to be competent on many levels -- though we hope he's not being spread thin as COO and President of Product. Each of them is a full time job.

 

NKE - Nike unveils hyper elite basketball crew socks

(http://www.fibre2fashion.com/news/garment-company-news/newsdetails.aspx?news_id=154353)

 

  • "Featuring specialized cushioning that responds to on-court movements, the Nike Hyper Elite Basketball Crew Socks deliver excellent impact protection. Dri-FIT fabric wicks sweat away and moves it to the fabric surface helping to keep feet dry and maintain a snug fit during play."

 

What's New Today in Retail (10/23) - chart6 10 23

 

Takeaway: Seemingly a rounding error -- but keep in mind that Nike used to sell plain white socks that topped out at around $10 per pair. Now they're selling them at $20 and higher.

 

WMT, GPS - Wal-Mart, Gap Press for Safety in Bangladesh

(http://online.wsj.com/news/articles/SB10001424052702304402104579151942188514188?mod=WSJ_business_whatsNews)

 

  • "A group representing two dozen North American retailers including [WMT] and [GPS] released a list of more than 620 factories that they use in Bangladesh, a move geared toward making its supply chain more transparent and improving working conditions in the South Asian country's garment industry."
  • "Those factories employ about 1.1 million workers, or about a quarter of the country's garment workers, according to the Alliance for Bangladesh Worker Safety, the retail group."
  • "Ellen Tauscher, a former California congresswoman who chairs the group's board of directors, said the group wants to send a message to Bangladesh factories that they won't get business from the U.S. if they 'remain in the shadows and don't adhere to the kinds of standards that are going to create a safe workplace.'"

 

Takeaway: Don't shoot the messenger here, but the reality is that this is mostly PR posturing for both GPS and WMT. The reality is that when push comes to shove, they won't foot the bill for the changes that they demand. They want safer conditions, but they want the factory to pay for it. If the factory owners don't write the check, then workers will continue to function in extremely unsafe facilities.

 

INDUSTRY NEWS


Deloitte predicts bright holiday shopping season for retailers

(http://www.retailingtoday.com/article/deloitte-predicts-bright-holiday-shopping-season-retailers)

 

  • "Deloitte's 28th annual survey of holiday spending intentions and trends indicates shoppers surveyed plan to spend an average of $421 on holiday gifts this year, up from $386 last year. They also expect to buy an average of 12.9 gifts, ending a five-year decline in the number of gifts they plan to purchase."
  • "Nearly half (47%) of consumers plan to purchase items online, followed by 44% at discount/value stores. More than three-quarters (76%) of consumers cite convenience as a reason for shopping online, followed by price (63%)."

Takeaway: Maybe this survey has been directionally accurate in the past, but a 9% boost in per capita spending? Not gonna happen.


Getting Embarrassed

This note was originally published at 8am on October 09, 2013 for Hedgeye subscribers.

“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%

SPX 1651-1663

VIX 18.98-20.64

USD 79.74-80.61

Brent 109.02-110.46

Gold 1291-1333

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Getting Embarrassed  - Deficit COD

 

Getting Embarrassed  - vp10 9


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

October 23, 2013

October 23, 2013 - Slide1

 

BULLISH TRENDS

October 23, 2013 - Slide2

October 23, 2013 - Slide3

October 23, 2013 - Slide4

October 23, 2013 - Slide5

 

BEARISH TRENDS

October 23, 2013 - Slide6

October 23, 2013 - Slide7

October 23, 2013 - Slide8

October 23, 2013 - Slide9

October 23, 2013 - Slide10

October 23, 2013 - Slide11

October 23, 2013 - Slide12

 



Breaking Bad

“Someone has to protect this family from the man who protects his family.”

-Skyler White

 

Who is Bernanke’s family? Who is Ben Bernanke? Who is John Galt? The People getting jammed with a trashed currency and 0% rate of return on their savings accounts want to know, “yo.” And they want to know now.

 

Yesterday’s all-time highs in the US stock market put a bloody pit in my stomach. I will not mince words about that and why this morning. Standing up to the tyranny of an un-elected-anti-dog-eat-dog-government-man is my Canadian-American patriotic duty.

 

Ben, seriously. If you aren’t going to taper, ever, why? Who do you represent? Is it the people in the business of being long bonds? Or is it the government that appointed you to lead this ongoing fear-mongering campaign? Both of our leading indicators on US #GrowthAccelerating (#StrongDollar + #RatesRising) are breaking bad, again. This one is all on you.

 

Back to the Global Macro Grind

 

“You clearly don’t know who you are talking to, so let me clue you in. I am not in danger, Skyler. I am the danger. A guy opens his door and gets shot, and you think that of me? No! I am the one who knocks!” –Walter White

 

That’s right Bernanke, I’m the one knocking. And it’s going to get louder if you keep this up. You can cart out everyone from PIMCO to Zervos at Jefferies to parrot whatever you think you are accomplishing here. I don’t buy it. You’re suspect.

 

I respect David Zervos’ penmanship and market views, so let’s break down why I think this could break bad versus what he thinks. We are two of the only consistent US stock market bulls of 2013 who have been bullish for completely different reasons:

  1. ZERVOS  - he thinks US stocks up in 2013 is all about QE and that we cannot afford to taper as that would end it all
  2. MUCKER – I think the most important part of the 2013 rally was on expectations of ending QE; not tapering is a disaster

Bernanke and the entire levered long bond bull lobby agree with Zervos. And I actually have no idea who agrees with me, which is probably why our call on US #GrowthAccelerating from 0.38% in Q412 to 2.5% now was the only one of its ilk. Our growth model called US #GrowthSlowing in October 2007 too. US Dollar Devaluation back then was my leading indicator.

 

So which one is it?

 

Oh, by the way, all of US economic and market history agrees with my view that:

 

1.       Strengthening currency + Rising Interest Rates = Pro-Growth Signals

2.       Devalued currency + Falling Interest Rates = #GrowthSlowing signals

 

In buckets of time, you only have to look past your nose and go beyond the #EOW (end of the world) stuff (2008) and look at the last 40 years of US economic history to understand my point. Both Reagan and Clinton understood this. Nixon/Carter (1970s) and Bush/Obama (last decade) did not. Markets can go up when growth slows; especially slow-growth styles like Gold and Bonds.

 

For those of you who think “the stock market going up reflects the economy, so Bernanke is nailing it”, I’ll remind you that’s a crock. Venezuela devalued its currency by 32% this year; its stock market is +312%; and its economy sucks – a Policy to Inflate via currency debauchery is not growth. It’s called inflation.

 

From Nero (50 AD) to 1920s Germany to whatever Chavez left in Venezuela, do not get me wrong, Zervos is quite right that keeping your government stimulated with a meth market can take you for quite a ride, yo! But, again, do not confuse the kind of move we saw yesterday with the one we saw before Bernanke decided not to taper on September 18th.

 

Rewinding the tapes, here’s what happened yesterday:

  1. US monthly payroll number missed by enough to validate Bernanke’s bs storytelling that we don’t need to taper
  2. US Dollar got smoked to a fresh YTD low
  3. US Treasury Yields snapped my 2.58% TREND line on the 10yr
  4. Gold ripped
  5. Slow growth sectors like Utilities (XLU) had triple the intraday move of the SP500

Is that what you want, yo? Another epic 2007 style US stock market bubble? If you do, we can go right back to reflating the Housing, Gold, Bond, Utility, Foreign Currency, etc. Bubbles. Kinder Morgan can trade at 85x earnings on that too. Rock on, yo.

 

So what do you want? As my man Walter White would say, “you all know exactly who I am. Say my name.” That’s right. I’m the guy who believes in fiscal conservatism, monetary tapering, a strong currency, and rising interest rates. “Now say my name.”

 

I’m the guy who went to net short yesterday (6 LONGS, 9 SHORTS in #RealTimeAlerts) and 54% Cash. Timestamped, yo. He’s Heisenberg. I’m going to roll with him, book gains, and protect my family and firm’s hard earned savings.

 

UST 10yr Yield 2.47-2.58%

SPX 1

VIX 11.55-14.96

USD 79.02-80.12

Euro 1.36-1.38

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Breaking Bad - Chart of the Day

 

Breaking Bad - Virtual Portfolio


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