“Sir, there are two passions which have a powerful influence on the affairs of men.”
And, in case you wondered whether or not your central planning overlords in Washington have yet to eliminate those two passions, they have only amplified them: “These ambitions are ambition and avarice; the love of power and the love of money.”
Franklin went on to add that, “separately each of these has great force in prompting men to action; but when united in view of the same object, they have in many minds the most violent effects. Place before the eyes of such men, a post of honour that shall be at the same time a place of profit, and they will move heaven and earth to obtain it.” (The Liberty Amendments, pg 23)
That’s why we all have no choice other than to Embrace Uncertainty in macro markets. There is nothing normal about a man from an un-elected US post moving your entire risk exposures with a whisper to the Wall Street Journal. Therefore you should not invest “normally.” Either #GetActive and do real-time macro or, as Dan Och recently said, “macro will do you.”
Back to the Global Macro Grind…
BREAKING: Budget Deficit In US Narrows To 5 Year Low on Record Revenues –Bloomberg News
Not to be confused with the fear-mongering headlines Bloomberg/CNBC were running about how a US debt “default” could spell the 6th #EOW (end of the world) event of 2013, the fine folks in NYC’s groupthink tank finally nailed it.
Eleven months ago, we got ragingly bullish on the US Dollar because the only 2 factors in the (P) part of (POLICY) in our GIP (Growth, Inflation, Policy) Model @Hedgeye were Dollar Bullish:
1. FISCAL FACTOR: US Deficit/GDP was going to get cut in half to 4% (it was just reported at -4.1%, so we were off by a bit) because A) sequestration is good (spending down) and B) US #GrowthAccelerating would drive the denominator (GDP) up
2. MONETARY FACTOR: US #GrowthAccelerating would surprise those anchoring on last year’s Q412 GDP report of 0.14%, the Fed would fall behind the curve, #RatesRising would surprise to the upside, and tapering expectations would take hold
So easy a hockey head can do it. Then, sadly, the Fed gave into the mega Bond Bull Lobby on September 18th, 2013, smoked the Dollar, took rates back down, and the MONETARY FACTOR for USD Bulls was lost (again).
But the FISCAL FACTOR (which can only be obfuscated by the Fed as opposed to arrested like Bernanke did with USD and Bond Yields) continued along its path of least resistance and US Government Revenues were +15.2% year-over-year in September (not a typo)!
Oh, and the SP500 ripped the front-teeth out of all those #OldMedia mouth-pieces who shorted the October 2013 fear-mongered low about a US default when the US credit position was in its best position in half a decade. #NewAllTimeSPYHighs
And so it begins, after all-time SP500 and Russell2000 highs in October (SPY = +4.5% OCT 2013), it’s November. What in god’s good name are we supposed to do next?
To answer the question in any country, I always go back to the playbook:
- USA: FISCAL = hawkish (bullish USD); MONETARY = dovish (bearish USD)
- EUROPE: FISCAL = hawkish (bullish Euro); MONETARY = hawkish (bullish Euro)
- UK: FISCAL = hawkish (bullish Pound); MONETARY = hawkish (bullish Pound)
And to be clear, when I say hawkish or dovish, I mean what’s happening from a 2nd derivative perspective (i.e. what’s happening on the margin relative to the last 3-6 months).
This is why we’re #EuroBulls (see our Q413 Global Macro Theme deck) relative to being as bullish as we were, literally up until September 18th (shame on you Bernanke), on US growth. Same playbook; different relative pick.
Everything in macro is relative. Every asset allocator has a choice. And when push comes to shove in the coming 3-6 months, what will it be, German stocks or US stocks?
While the Russell2000 dropped -1.9% from its all-time performance chasing high in the last 2-days, German stocks hit a fresh all-time high. Fortunately, Mr. Market keeps score; not you or me. He gets it.
Since I’ve been bearish on Commodities and Fixed Income relative to Equities for the better part of a year now, I consider this shift to European Equities vs US Equities within an asset class that I like. If the Fed leans on the long-end of the curve, you can still be long US Equities, just not the Equities that worked best in 2013. The Growth Style Factor gets repressed by Bernanke’s intervention.
Having had an asset allocation to Commodities of 0% all year (CRB Commodities Index is 19 Commodities and it’s -6.1% YTD, on its YTD lows), getting long Gold for the 1st time in a long time gets interesting here too. I haven’t pulled the trigger yet, but front-running the next Hilsenrath article is a compelling catalyst.
How would that work? On a Friday, Bernanke’s boys float a headline to the WSJ that there won’t be a December taper, the Dollar gets slammed, Rates fall, and Gold rips. Oh yes, ambition and avarice matters in the land of the conflicted and compromised. And we aren’t yet dumb enough to not front-run proactively predictable behavior.
Our immediate-term Risk Ranges are now:
UST 10yr Yield 2.48-2.60%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: RonJon breaks his silence. WMT's US mftgring initiative is smoke and mirrors. NFL jersey stats are in. TGT kicks off holiday price war.
JCP - Ron Johnson Speaks, Calls Reports On His J.C. Penney Tenure 'Largely Inaccurate And Surprisingly Uninformed'
- "Johnson told me via email that although it’s premature to discuss his tenure at J.C. Penney, he did say that much of the analysis of his stint at the chain has been 'lacking in depth, largely inaccurate, and surprisingly uninformed.'"
Takeaway: Maybe he's looking for a job.
WMT - Wal-Mart Boosts Made in U.S.A. Initiative
- "Bill Simon, Wal-Mart’s U.S. president and chief executive officer, revealed at an investment summit here Thursday that three of its suppliers have committed to moving production back to the U.S., or expanding existing capacity, as part of the retail giant’s longer-term commitment to buy $50 billion worth of American-made products over the next 10 years."
Takeaway: While we're all about boosting US production, let's put this into context. $50bn over 10-years is likely $1bn in year 1, and $10bn in year 10. But even if we want to be generous and call it $5bn per year, it's only 1% of the half a trillion worth of product WMT will sell next year. This is hardly WMT going all-out. It's a PR campaign more than anything.
MW, JOSB - Jos. A. Bank Prepared to Boost Men's Wearhouse Bid
- "The retailer said it would consider raising the original offer of $48 a share if 'given the opportunity to conduct limited due diligence in order to determine that such an increase would be justified.'”
- "In a letter to Men’s Wearhouse chief executive officer Douglas Ewert made public Thursday, Wildrick said that the $48 offer 'was necessarily based solely on publicly available information. We believe that if we were provided with access to a limited amount of non-public information, we could promptly determine whether we could increase our proposed acquisition price. We are, of course, prepared to execute a mutually acceptable non-disclosure agreement to provide Men’s Wearhouse with the assurance that any information provided will be kept confidential.'"
Takeaway: JOSB simply doesn't get it. MW wants to go solo as it builds a house of brands, instead of being a standard, run-of-the-mill mid-tier men's apparel retailer like JOSB. If the deal does happen, it's going to be at a price well above here. The simple fact that JOSB is so aggressive in wanting this transaction casts serious doubt in its ability to grow profitably through its existing model.
HBC - Hudson's Bay Begins a Beauty Metamorphosis
- "Hudson’s Bay is putting the finishing touches on an expansion and upgrade of the beauty selling departments of six of its 90 stores, four of them flagships."
- "It is the first major renovation of those floors in Toronto, Montreal and Vancouver in 15 years, according to Shelley Rozenwald, chief beauty adventurer and senior vice of cosmetics for Hudson’s Bay and Lord & Taylor."
- "The size of total departments also have significantly expanded. In the Yorkdale store, the beauty department has been doubled from 16,000 square feet to a total of 32,000 square feet. The entire store measures 200,000 square feet. The other stores, particularly Vancouver, picked up an additional 30 to 40 percent of space in their beauty departments."
Takeaway: Big investment in an area that is among the most profitable for Macy's, Bloomingdales, and Nordstrom. But renovating 6 of 90 stores isn't going to move the needle.
DKS - Broncos and Seahawks Top NFL Jersey Sales
- "Through the midway point of the NFL season, Dick's Sporting Goods Jersey Report is showing that Denver Broncos or Seattle Seahawks are by far the two most popular teams. In seven markets across the country (New York, Boston, Indy, Washington, Chicago, Dallas, and Atlanta), the Broncos and Seahawks are second (or third) in sales behind the local team(s)."
- Team Sales Top 10 through Week 8 (The number in parenthesis indicates the team’s ranking in Week 1)
- Denver Broncos (2)
- Baltimore Ravens (3)
- Indianapolis Colts (5)
- Chicago Bears (4)
- Washington Redskins (1)
- New York Giants (6)
- Pittsburgh Steelers (7)
- New England Patriots (9)
- Seattle Seahawks (15)
- Philadelphia Eagles (16)
- Player Sales Top 10 through Week 8 (The number in parenthesis indicates the player’s ranking in Week 1)
- Peyton Manning (2)
- Andrew Luck (3)
- Robert Griffin III (1)
- Russell Wilson (16)
- Tom Brady (9)
- Ray Rice (5)
- Eli Manning (6)
- Joe Flacco (7)
- LeSean McCoy (21)
- Colin Kaepernick (11)
Takeaway: Not a surprise to see either of those teams at the top. The player jerseys are more interesting. The fact that Peyton and Andrew Luck are 1 and 2 is borderline hysterical. As for the other Manning, it's good to see that he still ranks number 7 despite the year he's having. He's got some loyal fans.
WMT - Green Dot and Walmart Expand Walmart MoneyCard Portfolio with a Suite of Prepaid Debit Cards
- "Green Dot Corporation and Walmart today announced they have expanded the line of Walmart MoneyCard® reloadable prepaid debit cards to include six new card types designed to meet the needs of their growing customer base. Issued by Green Dot, the Walmart prepaid debit card portfolio now includes nine cards, and is available in more than 4,100 Walmart stores nationwide."
Takeaway: Timed perfectly with the expiration of food stamp stimulus.
TIF - Tiffany Scores $2.2M Judgment Against Cyber Counterfeiters
- "Filed in the southern district of Florida, the lawsuit named 78 defendants operating Web sites such as salestiffany.net, shoptiffanyco.com, tiffanyandcomall.com, tiffanycooutlet.co.uk, which sold counterfeit Tiffany jewelry."
- "As part of the judgment, the court required that the Web site operators’ infringing domain names be transferred to Tiffany. It also requested that $2.2 million be paid to Tiffany, but tracking down Internet counterfeiters to collect damages is extremely difficult, making the likelihood of collecting very slim."
Takeaway: Gotta hand it to TIF. This is yet another win for its counterfeiting police. These guys are not only resilient, but they're hugely successful.
Triumph - Triumph Launches Line With Helena Christensen
- "Triumph International, the world’s largest lingerie company, will launch its first e-commerce site for the U.S. market today."
- "The Web launch is part of an aggressive initiative of the $2.1 billion intimate apparel and underwear firm to enter the U.S. innerwear market, which generates annual retail sales of $14.5 billion."
- "The company, whose brands include Triumph, Sloggi, Valisère and Hom, opened its first Triumph stores in the U.S. at the Walt Whitman Shops and Roosevelt Field mall in Huntington Station and Garden City, N.Y., respectively, in August. A third store is slated to open in New Jersey in early 2014."
Takeaway: WWD is getting a little loose with its facts and figures here. Triumph is not the world's largest lingerie company. Victoria's Secret is almost 20x larger.
TGT - Target Guests Should Expect to 'Pay Less' This Christmas
- "Aside from everyday low prices and special promotional deals, Target offers: Five percent off all purchases to REDcard Rewards members; Additional discounts to guests using its Cartwheel app; Price matching. Target will match the price of qualifying items between Nov. 1 and Dec. 21 if a guest finds the same item for less in a local competitor's ad or at select online retailers."
Takeaway: Amazon and Wal-Mart might have something to say about this.
TCS - The Container Store Group, Inc. Announces Pricing of Its Initial Public Offering of Common Stock
- "The Container Store Group, Inc. announced today the pricing of its initial public offering of 12,500,000 shares of its common stock at a price to the public of $18.00 per share. The shares will be listed on the New York Stock Exchange and will trade under the ticker symbol “TCS” beginning on November 1, 2013. The Container Store Group, Inc. is offering all 12,500,000 shares of common stock. The underwriters also have a 30-day option to purchase up to an additional 1,875,000 shares from the Company."
Takeaway: First they raised the range, then priced at the high-end. Not a surprise. This is a strong concept with ample unit growth (not to mention that the offering is only 12.5mm shares). Economics 101.
PERY, ELY - Perry Ellis International Expands Callaway Apparel Licensing Rights to Include Europe, Middle East and Africa
- " Perry Ellis International, Callaway Golf's apparel licensee, today confirmed an agreement to expand its current partnership...to design, manufacture and sell golf apparel across Europe, the Middle East and Africa."
- "Currently, the principal apparel distribution in the region is operated directly by Callaway Golf. Perry Ellis International will assume responsibility for distribution channels for golf apparel product across Europe, the Middle East, and Africa, transitioning on January 1st, 2014. The men's and women's European Callaway Fall 2013 line is currently available at retail at leading golf specialty stores and resorts in the UK, Ireland, Germany, Sweden, Norway, Spain, Portugal, Austria, Switzerland, Finland, Czech Republic, Turkey and the Middle East. The addition of South Africa as well as a full European roll-out of the brand is expected by Spring 2014."
Bangladesh: Garment Workers Refuse Third Wage Hike Offer
- "The government-formed Minimum Wage Board met today to settle the wage structure with an offer of Tk 4,250 ($55) per month, but the ready made garment (RMG) workers and their labor representatives were not having it."
- "The RMG industry has been embattled for weeks seeking a wage increase from the current Tk 3,000 ($39) per month—the lowest worldwide wage rate in the industry—to Tk 8,114 ($105), a number considered to be a more reasonable living wage for the sector’s four million workers."
- "Fearful factory owners came up from the previous offer in September to raise wages by 20 percent to Tk 3,600 ($47) after workers staged violent demonstrations and skipped work forcing factory closures in some cases. Just yesterday, more than 20 factories in Gazipur closed when workers demonstrated damaging production units so demands might be met."
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Client Talking Points
One of the best performing stock markets in the world this week was India’s Sensex. It closed up another +0.3% while markets like Japan were down -0.9% and Indonesia was down -1.7%. India is being rewarded for having a spine on their currency monetary policy – raising rates.
While the Russell 2000 corrected -1.9% from its all-time high into month end, EuroStoxx powered to close the month at new highs. I still like European stocks more than U.S. stocks because I like the Euro here more than the U.S. Dollar. Incidentally, the USD is immediate-term overbought within a bearish TREND.
Gold is holding flattish at $1322 this morning. I’m still waiting on buying Gold for the first time in a year. Research and risk signals are two entirely different things, and I tend to go with the signal over the research because I’m not smarter than the market. Our asset allocation to Commodities has been 0% for almost a year now (the CRB Index hit a new year-to-date low yesterday of -6.1%). So, buying gold would take me off 0%, if and when I do.
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Top Long Ideas
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
QUOTE OF THE DAY
I'm getting sick and tired of doing anything half-way. -Knute Rockne
STAT OF THE DAY
58%: For marijuana advocates, the last 12 months have been a period of unprecedented success as Washington and Colorado became the first states to legalize recreational use of marijuana. And now for the first time, a clear majority of Americans (58%) say the drug should be legalized. This is in sharp contrast to the time Gallup first asked the question in 1969, when only 12% favored legalization.
TODAY’S S&P 500 SET-UP – November 1, 2013
As we look at today's setup for the S&P 500, the range is 31 points or 0.94% downside to 1740 and 0.82% upside to 1771.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.27 from 2.25
- VIX closed at 13.75 1 day percent change of 0.73%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:58am: Markit U.S. PMI Final, Oct., est. 51.1
- 9:10am: Fed’s Bullard speaks on monetary policy in St. Louis
- 10am: ISM Manufacturing, Oct., est. 55 (prior 56.2)
- 11:15am: Fed’s Kocherlakota speaks on health care in Minn.
- 12pm: Fed’s Lacker speaks in Philadelphia
- 1pm: Baker Hughes rig count
- 5pm: Total Vehicle Sales, Oct., est. 15.43m (prior 15.21m)
- Commerce Dept holds Day 2 of SelectUSA Summit with speakers incl. Commerce Sec. Penny Pritzker, Sec. of State John Kerry, Caterpillar CEO Doug Oberhelman; Ludwig Willisch, CEO of BMW North America
- President Obama meets with Iraq’s Nouri al-Maliki at White House to discuss defense, security issues
WHAT TO WATCH:
- FAA to let airlines apply for broader use of electronics
- Dutch govt selling $8.7b of ING’s U.S. mortgage bonds
- U.S. rule change allows $500 carryover in flex spending acct
- China manufacturing gauge tops ests. in recovery boost
- Nortel patent owner Rockstar sues Google, Huawei: Reuters
- U.S. tech leaders calling for data use laws: Washington Post
- Google, Red Hat, Oracle engineers deployed for Obamacare fix
- MasterCard momentum may build vs Visa as Europe rebounds
- Barrick may raise $3.45b in share sale to reduce debt
- RBS suspends 2 forex traders; would be first suspensions: FT
- Pemex may list some assets on exchange as early as 2014
- Oct. U.S. auto sales may disappoint; SAAR may hit 15.4m
- Macau casino revenue surged to record $4.6b in Oct.
- Allete (ALE) 8:30am, $0.73
- American Axle & Manufacturing (AXL) 8am, $0.56
- Buckeye Partners (BPL) 7am, $0.83
- CBOE Holdings (CBOE) 7:30am, $0.45
- Chevron (CVX) 8:30am, $2.70 - Preview
- Church & Dwight (CHD) 7am, $0.73
- Emera (EMA CN) 7:10am, $0.35
- Exelis (XLS) 7am, $0.41
- Fortis (FTS CN) 7am, $0.26
- Genesee & Wyoming (GWR) 6am, $1.22
- Madison Square Garden (MSG) 7:30am, $0.22
- Newcastle Investment (NCT) 6:30am, $0.12
- NextEra Energy (NEE) 7:30am, $1.39
- NorthStar Realty Finance (NRF) 7:30am, $0.24
- NV Energy (NVE) 6:31am, $0.89
- Oaktree Capital (OAK) 8:30am, $1.00
- Pembina Pipeline (PPL CN) Aft-mkt, $0.26
- SNC-Lavalin (SNC CN) 8:27am, $(0.47)
- Spirit Aerosystems (SPR) 7:30am, $0.61
- Telephone & Data Systems (TDS) 7:58am, $(0.10)
- Ultra Petroleum (UPL) 8am, $0.35
- United States Cellular (USM) 7:59am, $0.09
- Washington Post (WPO) 8:30am, est. N/A
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Palm Oil Enters Bull Market on Best Weekly Gain in Three Years
- Wheat Analysts Most Bearish in Year on Record Crop: Commodities
- Gold Heading for First Drop in Three Weeks on Fed Speculation
- Palm Oil Supplies in Indonesia Seen Disrupted by Prolonged Rains
- WTI Crude Heads for Longest Run of Weekly Declines Since 2012
- Copper Rises as China Manufacturing Expands More Than Estimated
- Wheat Poised for Worst Week Since June as India to Boost Supply
- China Refined Lead Market Seen by Antaike in Deficit in 2014
- India Iron Ore Exports to Remain Subdued, Morgan Stanley Says
- OPEC October Crude Production Climbs in Survey on Iraqi Gain
- U.S. Gulf Crude Sinks to Lowest Against Imports: Energy Markets
- Wal-Mart to Widows Will Feel U.S. Food Stamp Cuts Starting Today
- Founder of Top India Commodity Exchange Resigns Amid Probe
- China Gold Imports From Hong Kong Fall on Premium, Slow Demand
The Hedgeye Macro Team
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