Parasitic Policy

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

“By definition, a government has no conscience. Sometimes it has a policy, but nothing more.”

-Albert Camus


With the debt ceiling and government shutdown behind us (at least for a few months), we can now all go back to focusing on doing investment research.  Well, not so fast, now we actually have to focus on the Federal Reserve.  The key question there is, of course, will they taper or not taper.


Yesterday, we wrote in the Early Look about an interesting study from the San Francisco Fed, which showed that the Fed’s program of quantitative easing had a de minimis impact on the real economy.  We would actually take it a step further and suggest that with the inflation of commodities due to printing more dollars, QE may have even eaten into the real economy.


In that regard, we were trying to think of an analogy from the animal kingdom that best represented the impact of QE on the real economy and very naturally the tape(r) worm came to mind.  For those that didn’t know the following is a description of a tape worm (emphasis mine):


“Tapeworms, or cestodes, are intestinal parasites; they are worms that are flattened like a tape measure. A tapeworm cannot live freely on its own - it survives within the gut (intestine) of an animal, including a human.”


To be fair, my assessment that QE effectively eats into its host, the real economy, has led to some push back.  As my colleague Christian Drake rightfully pointed out to me earlier this week, while QE may not have an impact on the real economy, it does have an impact on asset prices.  As an example, in the Chart of the Day we show the S&P 500 index with and without the twenty-four hour pre-FOMC returns.


The implication of this chart is quite astoundingly that the Fed may be responsible for almost all returns of the SP500 since 1994.  Further, if QE truly does inflate asset prices, as the correlations suggest, then there is likely a wealth impact that ultimately does impact the economy by the way of increased consumption.


As we stand here today though, it seems much easier to argue that some easing of stimulus is likely to strengthen the U.S. dollar and deflate oil, which is probably the most important consumer stimulus the Fed could implement over the coming quarters and years.  Hopefully, Mrs. Yellen gets the memo on this point.  Let’s face it, if oil were at $50, we’d all be buying jelly doughnuts for the office.


Back to the global macro grind . . .


As noted, the government is back to work and the debt ceiling is averted, so now the global equity markets should be rallying hard.  Well, that’s not quite how it is working out this morning.  U.S. futures are down, Europe is off 25 – 80 basis points, and Asia is up, albeit small.  So much for the party!


As we, and people much smarter than us have often said, markets don’t like uncertainty and our fine elected officials have now created more uncertainty with a number of looming deadlines, specifically:


-          December 13th – the date when a House-Senate committee will report back on negotiations on a longer term budget deal;

-          January 15th – the date on which the government is now open until subject to another budget agreement being reached; and

-          February 7th – the next debt ceiling.


Now of course, Washington is changing this morning.  Former Newark Mayor (although we understand he didn’t actually live there) Cory Booker is the newly minted Senator from New Jersey.  We knew Cory when we were undergrads at Yale and he was in law school and he can be persuasive, but we aren’t sure even he can resolve this mess of catalysts that Congress will be dealing with in the next three months.


So, speaking of the real economy, what impact does this massive amount of uncertainty have?  According to Gallup, the economic confidence index has fallen off a cliff in the last month from -15 (a range it had been in for awhile) to -40.  With such short term and potentially negative catalysts on the horizon, it is unlikely this confidence improves meaningfully.


Luckily, as global asset allocators, we have the choice to be underweight the U.S. and our view on Europe is looking very compelling on a comparative basis as we highlighted in our recent Q4 theme - #EuroBulls. The euro, a currency we do have longer term issues with, is breaking out on our quant models and is up another 70 basis points this morning to $1.3629 versus the U.S. dollar. 


Increasingly, the recent data from Europe is also supportive of being a #EuroBull.  Some examples include:


-          Greek 10-year yield down 206 basis points month-over-month to 8.4%;

-          Eurozone September CPI benign at 1.1%;

-          European new passenger car registrations up the most in two years at +5.4% year-over-year in September;

-          European ZEW economic expectations at 59.1 in October, a sequential improvement from September; and

-          U.K. ONS house price index +3.8% in August which beat expectations and increased sequentially.


To be fair, all is not great in Europe. But, in global macro markets, change happens on the margin, and on the margin the European economy is improving.


Our immediate-term Risk Ranges are now:


UST 10yr yield 2.66-2.73%

SPX 1685-1725

VIX 15.21-17.63

USD 80.11-80.67

Brent 110.01-112.05

Gold 1265-1303


Good luck out there today.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research 


Parasitic Policy - The Drift


Parasitic Policy - z. vp 10 17

The Doppelganger Fed

“One day everything will be well, that is our hope. Everything’s fine today, that is our illusion.”



In German folklore a doppelganger is literally a paranormal double of a living person. More contemporarily, the word doppelganger is used to identify a person that closely resembles someone else either physically or behaviorally. As an example, some people have suggested that my doppelganger is Russell Crowe.


As it relates to the Federal Reserve, the biggest question facing investors currently is whether Janet Yellen will be a doppelganger, in terms of policy and communication, of current Chairman Ben Bernanke (more commonly known as The Bernank).  Practically speaking, copying Bernanke’s behavior is likely to mean a continuation of QE Infinity.


Keith had some colorful comments on Fox Business last night as it relates this idea of QE Infinity. The video is attached in the link below and Keith’s comment begin at around the 3:00 mark. As Keith notes, the biggest issue is that the Fed is confusing the market which has dramatically heightened interest rate volatility this year.


Paul Singer from Elliott Management made a similar statement in his letter to investment partners yesterday where he wrote:


“QE Infinity” has so distorted the prices of stocks and bonds that nobody can possibly determine what the investing landscape would look like, or what the condition of the economy and financial system would be, in the absence of Fed bond-buying.”


This is indeed the issue, namely that the economy and investors have become so accustomed to abnormal interest rate policy, that they have an incredibly difficult time determining what normal is anymore.  Sadly, the new normal appears to be to wait for the Fed’s next whisper to the Wall Street Journal’s Jon Hilsenrath.


To be fair, for those that are into reading Federal Reserve tea leaves, there was communication other than whispers to Hilsenrath yesterday. Specifically, in its statement the Federal Reserve made three changes:

  • This clause was removed, “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market”;
  • They changed ”that economic activity has been expanding at a moderate pace” to “generally suggests that economic activity has continued to expand at a moderate pace”; and
  • They removed the “some” from this statement - “Some indicators of labor market conditions have shown further improvement”.

Maybe it is just me, but I’ve been reading English for a long time now and I have no idea what the implication is of those changes.


The fact is that the bogey that remains out there is 6.5% unemployment and if we take their word then the Fed will:


“. . . keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent.”


Although, even there, The Bernank has been quite dodgey as he has at times alluded to 7% being the bogey for altering monetary policy and other times suggesting he would lower the bogey to 6%. But if we accept the current 6.5% target, QE Infinity is likely to continue at the rate of $85 billion, give or take, for the for seeable future. 


In the Chart of the Day, we’ve highlighted the growth of the Federal Reserve balance sheet since 2008 as a result of QE Infinity.  In total, the Fed is almost at $4 trillion in assets on its balance sheet.  Not to be the alarmist, but another reason that we may be in the low interest time zone for a lot longer than we realize is because of interest rate risk associated with the Fed’s balance sheet.


Ironically, some pundits (we won’t name names) have commended the Fed under Chairman Bernanke for being transparent and great at communicating.  Sadly, it doesn’t take much more than the last 24 hours to understand that a) the Fed is as bad at communicating as ever and b) this is why investors are so confused. Frankly, we see no reason to believe that Yellen will be anything but Bernanke’s doppelganger on the communication front . . . and so the confusion will go on.


Sadly for stock operators, this confusion has led to an environment in which fundamentals for companies are, at times, ignored.  As an example, let’s look at both earnings and sales results for SP500 companies:

  • Sales: 60% of companies that beat sales estimates subsequently outperformed the market to the tune of 3.7% on average.  The other 40% of companies that beat sales estimates underperformed the market over the subsequent 3-days by an average of -3.8%.   Subsequent performance for companies missing Sales estimates was similarly mixed.  
  • EPS:   56% of companies beating EPS estimates subsequently outperformed the market by ~3% on average while 44% went on to underperform the market by an average of -4.1%.  Subsequent performance for companies missing EPS estimates was similarly mixed.

In a nutshell, stock performance has had very little relation to fundamental performance in 2013.  More simply, it has been a structurally tough year to isolate Alpha.  But even there no one should be surprised, because it is a macro driven market.  And if you don’t do macro, macro will do you.


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.47-2.60%


VIX 12.85-14.92

USD 79.21-81.16

Brent 108.86-111.27

Gold 1


Keep your head up and stick on the ice,

Daryl G. Jones


The Doppelganger Fed - Chart of the Day


The Doppelganger Fed - Virtual Portfolio

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October 31, 2013

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TODAY’S S&P 500 SET-UP – October 31, 2013

As we look at today's setup for the S&P 500, the range is 16 points or 0.47% downside to 1755 and 0.44% upside to 1771.         










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.21 from 2.22
  • VIX closed at 13.65 1 day percent change of 1.79%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: RBC Consumer Outlook Index, Nov. (prior 50.7)
  • 8:30am: Init. Jobless Claims, Oct. 26, est. 338k (prior 350k)
  • 9am: ISM Milwaukee, Oct., est. 53 (prior 55)
  • 9:45am: Chicago Purchasing Mgr, Oct., est. 55 (prior 55.7)
  • 9:45am: Bloomberg Consumer Comfort, Oct. 27
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change


    • President Obama to speak on private-sector jobs, new business investment at Commerce Dept.’s Select USA Investment Summit
    • NRC, FEMA meet to discuss preliminary draft changes to Emergency Preparedness Criteria
    • 10am: Sen. Banking Cmte hears from Fed-New York’s EVP on revising guarantee for mortgage-backed securities
    • 10:15am: Sen. Foreign Relations Cmte. holds hearing on Syria


  • Facebook to limit ads as younger teens using site less
  • Deficit in U.S. narrows to five-year low on record revenue
  • ECB makes crisis cash lines at central banks permanent backstop
  • Morgan Stanley said to take 30% stake in Mitsubishi UFJ firm
  • Bank of Japan sticks with campaign of record monetary easing
  • Starbucks forecast trails ests. as Asia gains slow
  • Goldman shrinking pay shows Wall Street poised for bonus gloom
  • Citigroup, JPMorgan said to put currency dealers on leave
  • Oracle pay under fire from pension funds before annual meeting
  • Twitter mum on profit has roadshow attendees questioning value
  • Visa profit matches estimates as $5b buyback plan is set
  • Allstate profit slides 57% on loss tied to sale of life unit
  • Metlife misses estimates as insurer incurs costs in Australia


    • Advance Auto Parts (AAP) 8:30am, $1.42
    • Alamos Gold (AGI CN) 6am, $0.07
    • Alpha Natural Resources (ANR) 7am, $(0.76) - Preview
    • AmerisourceBergen (ABC) 7am, $0.74 - Preview
    • Avon Products (AVP) 7:01am, $0.19 - Preview
    • Barrick Gold (ABX CN) 6:30am, $0.50 - Preview
    • Beam (BEAM) 7:30am, $0.58
    • Bell Aliant (BA CN) 6am, C$0.42
    • Belo (BLC) 6am, $0.12
    • Bombardier (BBD/B CN) 6am, $0.10
    • Boyd Gaming (BYD) 7am, $0.01
    • Cardinal Health (CAH) 7am, $0.85 - Preview
    • Catamaran (CCT CN) 6am, $0.48
    • Cigna (CI) 6am, $1.62
    • Clorox (CLX) 8:30am, $1.01 - Preview
    • ConocoPhillips (COP) 7am, $1.45 - Preview
    • Discovery Communications (DISCA) 7am, $0.73
    • Enterprise Products (EPD) 6am, $0.69
    • Estee Lauder (EL) 7:30am, $0.73 - Preview
    • Exxon Mobil (XOM) 8:02am, $1.77 - Preview
    • GrafTech International (GTI) 7:04am, $0.02
    • Harman International (HAR) 8am, $0.84
    • Hillshire Brands (HSH) 7:30am, $0.35 - Preview
    • Imperial Oil (IMO CN) 7:55am, C$0.99
    • Incyte (INCY) 7am, $(0.09) - Preview
    • Invesco (IVZ) 7:30am, $0.52
    • Iron Mountain (IRM) 6am, $0.30
    • LKQ (LKQ) 7am, $0.25
    • Magellan Midstream Partners (MMP) 8:02am, $0.59
    • Marathon Petroleum (MPC) 7:14am, $0.63
    • MasterCard (MA) 8am, $6.94
    • MGM Resorts (MGM) 8am, $(0.03) - Preview
    • Mylan (MYL) 7am, $0.79 - Preview
    • New York Times (NYT) 8:30am, $(0.03)
    • NII Holdings (NIHD) 6:30am, $(1.17)
    • NiSource (NI) 6:30am, $0.17
    • Ocwen Financial (OCN) 7:30am, $1.09
    • Perrigo (PRGO) 7:44am, $1.39
    • Pinnacle West (PNW) 8am, $2.17
    • PPL (PPL) 6:57am, $0.68
    • Quanta Services (PWR) 6:07am, $0.45
    • Realty Income (O) 9:15am, $0.61
    • SCANA (SCG) 7:30am, $0.92
    • TECO Energy (TE) 7:30am, $0.33
    • Teradata (TDC) 6:55am, $0.70
    • Teva (TEVA) 7:30am, $1.25
    • Time Warner Cable (TWC) 6am, $1.64 - Preview
    • TransAlta (TA CN) 7:45am, C$0.18
    • Valeant Pharmaceuticals (VRX CN) 6am, $1.41
    • ViroPharma (VPHM) 7:30am, $0.15
    • Western Refining (WNR) 6am, $0.50


    • American International Group (AIG) 4pm, $0.96
    • Apartment Investment & Management (AIV) 4:05pm, $0.50
    • Camden Property Trust (CPT) 4:17pm, $1.02
    • DCT Industrial Trust (DCT) 4:10pm, $0.11
    • Fairfax Financial (FFH CN) 5:02pm, $4.26
    • First Solar (FSLR) 4:02pm, $0.95 - Preview
    • Fluor (FLR) 4:05pm, $1.03
    • Kodiak Oil & Gas (KOG) 4:01pm, $0.23
    • Mohawk Industries (MHK) 4:01pm, $1.90
    • MRC Global (MRC) 4:01pm, $0.45
    • Newmont Mining (NEM) 4:43pm, $0.32 - Preview
    • Northeast Utilities (NU) 4:15pm, $0.73
    • Omega Healthcare  (OHI) 6pm, $0.62
    • ON Semiconductor (ONNN) 4:05pm, $0.16
    • Piedmont Office Realty Trust (PDM) 5:02pm, $0.35
    • Public Storage (PSA) 5:05pm, $1.89
    • Republic Services (RSG) 4:10pm, $0.49
    • Southwestern Energy (SWN) 4:30pm, $0.50
    • Standard Pacific (SPF) 4:02pm, $0.12
    • Trimble Navigation (TRMB) 4:05pm, $0.36
    • Western Forest Products (WEF CN) Aft-mkt, C$0.04


  • WTI Crude Trades Near Four-Month Low as U.S. Stockpiles Climb
  • Oil Gambit Helps India Mining Billionaire Lead Rio: Commodities
  • Palm Oil Has Biggest Monthly Gain in Three Years as Supply Drops
  • Gold Extends Decline as Fed Sees Growth While Keeping Stimulus
  • Copper Heads for First Monthly Drop in Four on Taper Speculation
  • Cocoa Pares Fourth Monthly Gain as Demand for Halloween Is Over
  • Rebar Posts Monthly Loss on China’s Weak Winter Demand Outlook
  • Wheat Declines to Four-Week Low as India Seen Boosting Shipments
  • Barrick to Stop Pascua-Lama Mine Construction to Conserve Cash
  • Exchange Failure Prompts Commodity Bourse Audit: Corporate India
  • West African Oil Surge to Asia Seen Threatened: Energy Markets
  • Singapore Challenged as LNG Hub by Trading Delay: Southeast Asia
  • Copper 2014 Forecasts Slump to Low on Supply Additions: BI Chart
  • Glencore Xstrata Says Third-Quarter Copper Output Gains 34%


























The Hedgeye Macro Team














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