• run with the bulls

    get your first month

    of hedgeye free


#GrowthSlowing Signals

Client Talking Points


This happens infrequently, so pay attention. With the Financials (XLF) down -0.2% and Russell 2000 lagging at +0.3% last week (versus the slower growth Dow +1.1% and Utilities +2.0%), the VIX was actually UP +0.4% on the week, making a higher low. Not good.


The long-term love affair with Ben Bernanke has been epic. Since the no-taper decision, it's been Dollar Down, Gold Up. Gold was up +2.7% last week. It officially moves out of crash mode for the year-to-date at -19.8%. I'm still waiting for my levels to confirm before buying it. Stay tuned.


If you ask the bond market, Ben Bernanke is going to pander to the Bond Bull Lobby (check out 2.52% on the 10-Year this morning, below @Hedgeye TREND resistance of 2.60%, not a good US growth signal). Slow-growth styles loved this development last week. Utilities, MLPs and REITS all were up around 2% across their subsector ETFs. Isn’t this great?

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up.


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.


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


I'd need to see 10yr Yield close (and hold above) 2.61% to get back on the bear Treasuries train @KeithMcCullough


"Better to go to bed supperless then wake up in debt." -Ben Franklin


American Purchasing Power (U.S. Dollar) down -3.4% in the last three months to now negative -0.7% year-to-date. Euro +0.8% last week versus USD, now +4.0% year-to-date.

David and Goliath

This note was originally published at 8am on October 14, 2013 for Hedgeye subscribers.

“Even when you have three strikes, you’re still not out.  There is always something else you can do.”

-Tony La Russa


This weekend I read Malcolm Gladwell's most recent book, "David and Goliath - Underdogs, Misfits and the Art of Battling Giants." Now many of my academic friends are critical of Gladwell suggesting he cherry picks studies, but I sort of take his books for what they are: a compendium of interesting studies. Ultimately, it is up to the reader to accept or not accept his conclusions.  


As the title denotes, his most recent book is about perceived underdogs overcoming serious odds. He discusses why certain learning disorders may actually improve the chances of success of individuals (causes them to focus more intently), discusses the long term impact of California's three strikes laws (not positive for communities), analyzes how unconventional tactics in basketball can lead to outsized success (more full court pressing!), and a number of other interesting topics. 


One of the topics I found most interesting was the long run analysis of success in military conflicts.  As Gladwell writes, suppose you were to look at the conflicts that happened between very large countries and much smaller countries over the past 200 years.  In fact, let’s assume the size difference was 10x. How often would you assume the larger country wins?


Logically, and intuitively, it would seem likely that with that type of size advantage the larger country would dominate and likely win the conflicts close to 100% of the time. The reality is much different as the weaker countries have won almost 29% of the time. 


Even more insightful is the fact that the weaker side wins 64% of the time when employing unconventional, or guerrilla attacks.  Put another way, if the United States were to go to war with my home country of Canada (about 1/10 the population of the United States), you should put your money on Canada to win if the Canadians employed guerrilla tactics


Back to the global macro grind ...


We've had our own David and Goliath battle this year at Hedgeye as our Senior Energy Analyst Kevin Kaiser has taken on a couple of billionaire CEOs by making short calls on Linn Energy and the Kinder Morgan companies. As always, even though we believe our research supports a revaluation lower of both companies, time and Mr. Market will determine whether this call, versus the views of the energy Goliaths, is the right one. (Ping us at sales@hedgeye.com if you’d like to learn more about subscribing to the energy vertical.)


More practically, in investing, a bet against Goliath is often a bet against consensus.  Internally we run a number of screens to assess whether we are with or against consensus on any of our Best Ideas. As an example, is if company has 30 ratings from Wall Street and 29 of them are Buys that is likely more supportive of a short thesis, and conversely make us question whether we have differentiated enough insight to justify it as a stock to own.  Thinking unconventionally in investing is just as important as it is in warfare. 


The conventional thought according to the global macro pundits this morning is that some form of U.S. default is imminent.  This chatter has reached such an extreme that this morning Bloomberg was actually comparing the U.S. to the last major nation to completely stop paying back its debt – Nazi Germany.  Certainly, we have a good degree of respect for Bloomberg (in fact we all use their terminals), but a comparison like that seems erroneous, at best. 


In the Chart of the Day, we once again look at credit default swaps for 5-year U.S government debt.  Not only are CDS not at the same heightened levels of 2011 when they peaked at near 65 basis points, they are actually well off recently levels and currently trading at 34 basis points.  Given all of the fear mongering this weekend and headlines of discord in Washington D.C. perhaps they will spike again, but, certainly there is literally no chance that the U.S. government turns her back on the U.S. government debt obligations according to this market tell.


That all said, just because the probability of debt default is unlikely doesn’t mean you should be aggressively long of risk assets.  We trimmed the exposure in our real-time alerts products late last week going from a 3:1 long/ short ratio to 1:1.  Now most money managers can’t move this fast for reasons of scale, but the fact remains this is a market that will reward those who trade around positions. 


This is especially relevant broadly to the hedge fund industry this year.  According to Cambiar Investors LLC, shares that have been the most shorted are up 38% since the start of the year.  This is almost double the return of the SP500 in the same period.  Furthermore, according to the HFRI Equity Hedge Fund Index, hedge funds are up only 9.2% in the year-to-date. So far anyway, this has been a tough year for hedge funds to earn their 2 and 20.


In part it has been challenging for hedge funds and other active managers to out-perform because the variance between sectors has been abnormally low.  In our Q4 themes deck we show this graphically and the data indicated that this year is the second lowest year going back to 1990 for variance between sector returns at 0.50%.  The lowest was 2006 at 0.27%.  The historical mean since 1990 is 2.25%. So if there is one asset allocation bet you might want to consider, it is to #GetActive as sector variance is likely to only increase from these abnormally low levels.


Good luck out there today and feel free to ping us if you want to discuss how this week might play out from a catalyst perspective down in the nation’s capital.


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.61-2.71%

SPX 1683-1708

ShangHai Comp 2191-2247

VIX 15.19-18.98

USD 80.11-80.69

Brent 110.04-111.99


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


David and Goliath - U.S. CDS


David and Goliath - z. vp 10 14

What's New Today in Retail (10/28)

Takeaway: Nike puts out another $25k shoe. Watch the H&M spawn. Nike and Adidas battle w/ new apparel lines. More hints of Alibaba dominance.



ICON - Earnings Call: Tuesday 10/29 10:00 am




NKE - Converse Collaborates With Nate Lowman and Just One Eye



  • "...a new collaboration spearheaded by Los Angeles concept shop Just One Eye has turned the iconic sneaker into a canvas for Nate Lowman.  The New York-based multimedia artist created 21 unique high-tops using two of his own deconstructed works."
  • "Priced at $25,000, each limited-edition pair is lined in Italian calf leather and required 180 hours of work."


What's New Today in Retail (10/28) - chart1 10 28


Takeaway: That's $139/hr in labor. Pretty reasonable for an up and coming artist.


HMB - COS Builds Base for Expansion



  • "The much-anticipated younger sibling of H&M is opening its first U.S. store, a 4,500-square-foot flagship at 129 Spring Street in SoHo here, in spring 2014."
  • "COS, which stands for Collection of Style, is eyeing other locations in Manhattan, and plans to enter markets across the U.S. such as Chicago and California as it moves closer to a rollout in this country."
  • "COS, whose prices start where H&M’s leave off, offers modern, stylish and timeless collections produced from materials such as leather, fine suiting and cashmere. Prices range from $39 to $390 for dresses and $225 to $450 for men’s outerwear.  In addition to men’s and women’s wear, a full children’s collection launched in 2009."


Takeaway: Anytime HMB does anything, we watch and listen. The most notable factor here is that COS is testing the upper echelons of the price spectrum. That's not a slam-dunk by any means. If you asked 100 consumers why they shop at H&M, 50 would say its stylish, but the other 50 would say it's cheap. We're curious to see how the new M.O. resonates with consumers.


JCP - JCPenney picks shopkick mobile app to reward customers



  • "J. C. Penney Company, Inc. announced that it has teamed up with shopkick, the most widely used real-world shopping app that rewards shoppers for simply walking into stores."
  • "Just in time for the key holiday shopping season, JCPenney shoppers will be able to earn 'kicks,' shopkick's proprietary reward currency, along with special offers from JCPenney, when visiting the retailer's nearly 1,100 store locations across the country. To celebrate the launch, JCPenney will be offering shopkick users additional kicks for a limited time when they visit a JCPenney store."
  • "When a shopkick user walks into a participating store, the app detects the shopkick signal emitted from a patent-pending device, which is picked up by the shopper's smartphone. The app then deposits kicks, which can be collected and redeemed for gift cards, song downloads, movie tickets, Facebook credits, donations to charities and more."


Takeaway: Yet another new initiative that no one will give JCP one iota of credit for.


KER - Puma's Revenues Slide in Q3 



  • "Puma's Q3 revenues slid 7.6 percent in the third quarter to £824.8 million ($1.14 bn) from £892.2 million, according to a revenue update from its parent, Kering. Puma’s sales for the quarter were down 0.8 percent on a comparable basis. The decline was due to lower footwear sales. Accessories and apparel were up 7 percent and 4 percent, respectively."
  • "By country, Kering noted in its presentation with analysts that sales in North America, representing 20 percent of Puma's sales, grew 5 percent. In other regions, Western Europe (representing 34 percent of Puma's sales) was down 2 percent; Japan (8 percent), was down 6 percent; Asia Pacific (13 percent), slipped 1 percent; and Other Countries (25 percent) was also off 1 percent."


Takeaway: At least Puma put up a +5% number in the US.  It might not be its biggest region, but it's one of the most important.


HBC - Hudson's Bay Co. Taps Michael Crotty and Russ Hardin



  • "Hudson’s Bay Co...has named Michael Crotty executive vice president and chief marketing officer, and Russ Hardin senior vice president and chief creative officer."
  • "Crotty has more than 25 years experience in multichannel retailing, marketing and brand management...Rodbell [incoming President of the HBC Department Store Group] said Crotty will be responsible for the overall marketing strategy for Hudson’s Bay and Lord & Taylor."
  • "Hardin recently worked at Kohl’s...Rodbell said Hardin will be responsible for building all creative elements for Hudson’s Bay and Lord & Taylor, and lead social media, public relations and event activities."


Takeaway: If HBC can source such talent, can someone explain to me why JCP can't find a CEO?


NKE - Nike unveils Hi-Vis winter apparel collection



  • "...Nike has created the Hi-Vis Collection of winter apparel, footwear and equipment enabling athletes to train and play at the same intensity throughout the season and with zero distractions.  The Hi-Vis Collection features bright and contrasting color combinations of Volt, Electro Purple, Green Glow and Electric Green on the apparel, footwear and equipment."


What's New Today in Retail (10/28) - chart3 10 28


Takeaway: This is a big deal for Nike, as it has been absent in large part from cold-weather gear since it backed away from its All Conditions Gear (ACG) line.


ADS - Adidas & NBA to debut new on-court collection



  • "As tip-off nears on Oct. 29, adidas and the NBA will debut an all-new premium collection of on-court apparel. The NBA On-Court Collection will outfit all 30 NBA teams…"


What's New Today in Retail (10/28) - chart2 10 28


Takeaway: Nike hates this kind of press. That said, it would rather focus its efforts on what people wear on their feet -- not their warm-ups.


LVMH - Kenzo Opens Shanghai Store



  • "Located in the newly opened L’Avenue mall in the city’s western district of Hongqiao, the 2,500-square-foot store is the brand’s seventh point of sale in China’s financial capital."
  • "L’Avenue is a joint venture between LVMH Moët Hennessy Louis Vuitton’s real estate arm, L Real Estate, and Hong Kong real estate developer Stanley Ho. It’s populated with some of LVMH’s leading brands, including Louis Vuitton, Dior, Fendi, Céline and, now, Kenzo."




Western Retailers See Online as Ticket to China



  • "The promise of e-commerce in China has attracted foreign companies for years. Yet Western companies, such as eBay Inc.,  Google Inc., and Groupon Inc., have struggled in China, partly because of competition from domestic giants. Western retailers also have had concerns about the difficulties of distribution in the country and its Web shoppers' insistence on low prices."
  • "But China's e-commerce—which, by some measures, overtook the U.S. this year as the world's largest online retail marketplace—has become too big to ignore. Online retail sales in China are expected to reach about $540 billion by 2015, compared with roughly $345 billion in the U.S., according to consulting firm Bain & Co. China's online retail sales have increased more than 70% annually since 2009, compared with 13% in the U.S."
  • "After closing branded stores in China, do-it-yourself home retailer Home Depot Inc. and electronics chain Best Buy Inc. this year opened stores on Alibaba's Tmall, the country's leading online consumer marketplace."
  • "China's shoppers also have come to expect heavy discounts, putting pressure on profit margins. In a Bain survey of 1,300 online shoppers in China this year, half the respondents said price was the No. 1 reason they shopped online."


Takeaway: Watch out for the Alibaba IPO. We've never seen such a dominant business model in anything that touches the consumer.


UPS forecast confirms e-commerce growth



  • "A compressed shopping season coupled with the continued growth of e-commerce has UPS forecasting that peak season daily package volumes will grow by 8%."
  • "UPS said it expects December 16 to be its highest volume day of the year with package pick-up expected to total 34 million. To put the growth of e-commerce in perspective, UPS said this year it expects there will be five delivery days within the peak season when package volume exceeds its busiest day last year. For example, after December 16, UPS said its next busiest volume day is expected to be Cyber Monday, December 2, when package volumes are forecast to total 32 million."


Takeaway: Unlike all those 'dart-throw' surveys by the NRF and various consulting firms, the UPS forecast is about as accurate as it gets.


What's Selling: Comfort




  • Propét Alta tall fleece boot
  • Cobb Hill Elaine embellished flat
  • Aravon Wendy loafer

Top fall trend: “More people are coming in looking for a casual shoe,” said Pam Dulaney, store manager. “However, the weather is still nice.”

DANCY’S, Boone, N.C.

  • Alegria clogs and Mary Jane styles
  • Aetrex Valerie stretch-vamp skimmer
  • Orthaheel 

Top fall trend: “Boots are taking off,” said GM Russell Gullet. “GoLites [are popular] in winter because they’re comfortable, warm and waterproof.”

WHEN THE SHOE FITS, Vancouver, Wash.

  • Dansko Tamara clog-based slip-on
  • Keen Toyah lace-up style
  • Merrell Encore clog series

Top fall trend: “Customers want to be a little dressier with comfort [features],” said President Alan O’Hara. “They prefer a little heel, and brands such as Pikolinos, Taos and Earthies have options in this [area].”

ELEMENTS, Berkeley, Calif.

  • Earth Catamount wedge boot and Bellweather skimmer
  • Fly London Yoko platform wedge
  • Bernie Mev woven upper on memory-foam outsoles 

Top fall trend: “Ankle boots are a new trend this season,” said manager Penelope Adibe. “We are also doing well with wedges.”


  • Wolky Rosa lace-up style
  • Pikolinos ankle boots
  • Brooks Addiction

Top fall trend: Ankle boots are performing at the store, said owner Chris Harrison. “Women already own knee-high boots, and they last a long time.”


Cambodia: 22% Spike In Garment Exports



  • "Cambodia’s garment export sector is booming according to numbers recently released showing a healthy increase of 22 percent in the nation’s shipments of clothing to foreign customers from the first of the year through September."
  • "Total value of the exported apparel during the nine-month period hit $4.1 billion, substantially higher than the previous period last year of$3.44. As usual in recent years, the US was Cambodia’s best customer for their apparel, importing about $1.21 billion in goods."
  • "Cambodia is one of the latest countries of Southeast Asia to emerge as a major sourcing center as international firms send more business to that part of the world, attracted by low labor costs and a government and political environment hospitable to business."


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.

Fed Powers

“The powers delegated by the proposed Constitution to the federal government are few and defined.”

-James Madison


In other news, one of Bloomberg’s leading headlines this morning takes the other side of Madison’s Federalist Papers: “Yellen Poised to Rival Obama with Financial Power.” Isn’t that just terrific!


Have no #EOW (end of world) fear, yet. There are plenty of voices in America (and abroad) who still believe that an un-elected, un-checked, and un-accountable Federal Reserve is about to meet its maker – The People.


“Unlike the modern Statist, who defies, ignores, or rewrites the Constitution for the purpose of evasion, I propose that we, the people, take a closer look at the Constitution for our preservation.” –Mark R. Levin, The Liberty Amendments (pg 12)


Back to the Global Macro Grind


I’m not a Tea Party person, but I often wonder why more dogmatic Democrats don’t show “folks” like Mark Levin some love. Some of these Constitutionalists hate the Republican party more than Dems do!

Irrespective of your politics or Sox/Cards affiliation, every morning in America is a great one where we can “take a closer look at the Constitution” and the un-precedented power both Bush and Obama have put in the hands of Bernanke and Yellen.


I read Levin’s new book in 8 hours. At a bare minimum, it was worth my time to re-realize what I didn’t remember about the US Constitution. At a maximum, it made me think. Unless Americans want their currency to burn, Venezuelan style, they better start thinking about this, and fast, too.


Last week’s US #GrowthSlowing signals in equities we’re definitely considering what Down Dollar, Down Rates means:

  1. Slow-Growth Indices led last week’s US stock market strength: Utilities (XLU) +2.0%, REITS +1.8%, MLPs +1.7%
  2. Pro-Growth Indices flashed their 1st major negative divergence of 2013: Russell2000 +0.3%, Financials (XLF) -0.2%

If you broaden your vantage point to currencies and commodities, you can see the causal Fed factor at work here:

  1. US DOLLAR: down another -0.6% last wk and down -3.4% in the last 3 months to now NEGATIVE -0.7% YTD
  2. GOLD: up another +2.7% last wk and up +1.7% over the same 3 month period as Mr. Market front-runs the Fed

All the while, what the Fed is really sponsoring here (volatility instead of price stability) flashed its 1st major divergence versus the “US stock market at all-time highs” thingy in 2013. Stocks up = VIX up.


Not to be confused with every other US equity market rally of 2013 that we were long of (we’re short this one):

  1. US Equity Volatility (VIX) is making a series of higher-lows (instead of lower-lows) now
  2. The 11-handles that the VIX saw in both March and August of 2013 were aligned with US #GrowthAccelerating

No, this has nothing to do with being a Republican or Democrat. It has nothing to do with social issues either. It has everything to do with Mr. Market’s expectations of what causal impact the Fed’s “no-tapering” decision could have on the slope of US economic growth.


To review US economic growth’s slope in 2013:

  1. #GrowthAccelerating: Q4 2012 GDP of 0.14% accelerated to +2.48% by Q2 of 2013
  2. ISM and PMI “New Orders” pinned 60-handles in Q3 of 2013
  3. The first batch of OCT 2013 weekly and monthly US economic data has slowed, sequentially

“Sequentially” is an important word. How many of your favorite political market/econ pundits could even tell you what it means? *Hint: slope of the line.


And away from this week’s FOMC decision to pander to the Bond Bull Lobby, you’ll be getting more of what you saw in the US Consumer Confidence (U of Michigan survey) last week (73.2 OCT vs 77.5 SEP, #GrowthSlowing). Here’s the Macro calendar:

  1. Thursday: Chicago PMI for October should slow sequentially from September’s 55.7
  2. Fiday: ISM for October should slow sequentially from September’s 56.2

I know. Who cares? It’s all about the Fed right? Yeah, right.


More like it’s all about your investing Style Factors. To get those right, you need to get the slope of these growth lines right.


And if, god forbid, we take a few hours to consider the Constitutional conflict of interest in the Fed trying to “smooth” things embedded in the line (like gravity and/or growth), we might actually drive ourselves right nuts.


I can get nuts. I felt nuts selling at the all-time highs of October 2007 too.


Our immediate-term Risk Ranges are now as follows:


UST 10yr Yield 2.44%-2.60%



VIX 11.59-14.96

USD 78.72-79.71

Gold 1


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Fed Powers - Chart of the Day


Fed Powers - Virtual Portfolio

October 28, 2013

October 28, 2013 - Slide1



October 28, 2013 - Slide2

October 28, 2013 - Slide3

October 28, 2013 - Slide4

October 28, 2013 - Slide5



October 28, 2013 - Slide6

October 28, 2013 - Slide7

October 28, 2013 - Slide8

October 28, 2013 - Slide9

October 28, 2013 - Slide10

October 28, 2013 - Slide11


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.