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Fed Breeding Contempt

Client Talking Points


The impact of Janet "Mother of All Doves" Yellen was precisely what it should have been on both currencies and interest rates. See Dollar Down, Rates Down with no plan to taper anytime soon. The US Dollar Index failed at our Hedgeye TREND of $81.39 which makes the EUR/USD look stronger now even though the ECB cut rates.


Treasury yields sold off into and out of the Yellen Dove-Fest. Now it gets interesting as my TREND line of support is 2.63%. Resistance is 2.81%. For now, I’m looking for 2.63% to hold. So shorting Treasuries is back in my head again.


It's been just a disaster of a year for Commodities. The CRB Index hit a fresh year-to-date low yesterday down -7.8%, in spite of US Dollar weakness. After selling Gold into that Thursday Yellen bounce, my asset allocation to Commodities is back at 0%. We are short Oil too in #RealTimeAlerts.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.


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


Yellen is so scary for American Purchasing Power (USD) that even the Euro hangs in post rate cut @KeithMcCullough


Realize that if you have time to whine and complain about something then you have time to do something about it. - Anthony D'Angelo


$13,000,000,000: The Justice Department and JPMorgan Chase are nearing completion of a $13 billion settlement related to the bank's past mortgage practices. A final deal is expected as soon as today.

November 19, 2013

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TODAY’S S&P 500 SET-UP – November 19, 2013

As we look at today's setup for the S&P 500, the range is 30 points or 0.87% downside to 1776 and 0.81% upside to 1806.                  










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.40 from 2.39
  • VIX closed at 13.1 1 day percent change of 7.47%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Employment Cost Index, 3Q, est. 0.5% (prior 0.5%)
  • 9:am: Chicago Fed’s annual agriculture conference
  • 11am: Fed to purchase $2.75b-$3.5b in 2021-2023 sector
  • 11:30am: U.S. to sell 4W bills
  • 2:15pm: Fed’s Evans speaks in Chicago
  • 4:30pm: API weekly oil inventories
  • 7pm: Fed’s Bernanke speaks to Economists Club in Washington


    • 8:40am Institute of Medicine holds workshop on impact of Affordable Care Act on preparedness resources,  programs. Asst HHS Sec. Nicole Lurie to speak. National Academy of Sciences
    • 1:30pm: Vice President Joe Biden travels to Houston to speak on infrastructure, economy; Transportation Sec. Anthony Foxx attends.
    • 1pm: Media briefing by Press Sec. Jay Carney.
    • 1pm:U.S. Department of the Interior Bureau of Reclamation holds a public meeting and technical workshop on cost allocation study for the Central Valley Project
    • 3pm: Senate Cmte on Homeland Security and Governmental Affairs holds hearing on risks of virtual currencies, with Bitcoin Foundation General Counsel Patrick Murck. 342 Dirksen
    • 2pm: Office of the Comptroller of the Currency’s Mutual Savings Association Advisory Cmte holds a public meeting on current condition, regulatory changes of mutual savings


  • JPMorgan said to agree to final details of $13b settlement
  • JPMorgan said in talks to sell $4b private-equity stakes
  • U.S. opens probe of fires in Tesla’s Model S electric sedan
  • OECD cuts global growth forecasts on emerging-market slowdown
  • Apple can pursue U.S. block of Samsung smartphones, court says
  • Apple said to be in talks to Buy Israel’s PrimeSense
  • Sony said hiring Bain to find $100m in entertainment cuts
  • Dropbox said to be seeking more than $8b value in funding
  • Yellen nomination for Fed chairman to get panel vote this wk
  • NLRB accuses Wal-Mart of illegally firing workers who protested
  • Cepsa to Buy Coastal Energy for $2.2b to raise Asian Output
  • CLP agrees to pay $1.8b for stakes in two Exxon units
  • European car sales rise second straight month on Spain surge
  • Camp aide said to tell groups tax proposal possible by January
  • U.K. said to investigate traders’ personal currency dealing
  • Spain sells 1-yr bills to yield 0.678%, lowest on record


    • Best Buy Co (BBY) 7am, $0.12 - Preview
    • Campbell Soup Co (CPB) 7:30am, $0.86
    • Diana Shipping (DSX) 7:45am, $(0.06)
    • Dick’s Sporting Goods (DKS) 7:30am, $0.39 - Preview
    • George Weston (WN CN) 8am, $1.44
    • Home Depot (HD) 6am, $0.90 - Preview
    • La-Z-Boy (LZB) 4pm, $0.26
    • Medtronic (MDT) 7:15am, $0.90 - Preview
    • Saks (SKS) 8am, $0.11
    • TJX Cos. (TJX) 8:28am, $0.74 - Preview
    • Trina Solar (TSL) 6:30am, $(0.21)
    • Valspar (VAL) 7:30am, $0.92


  • Indonesia Weighs Ore Ban as Citigroup Increases Nickel Forecast
  • Gold No Slam-Dunk Sell in China as Aunties Pounce: Commodities
  • WTI-Brent Nears Widest Since March Amid Stimulus Taper Talk
  • Copper Declines to Three-Month Low on U.S. Builder Sentiment
  • Cocoa Halts Rally as Ghana May Accelerate Sales From Next Crop
  • Rubber Declines for Second Day as Yen’s Rebound Weakens Appeal
  • Gold Swings as Investors Weigh Stimulus After Rally in Equities
  • Wall Street Pushes Back on CFTC’s Advisory for Overseas Swaps
  • Egypt’s Thirst for Cheap Gas Threatens Export Prospects: Energy
  • Japan Seeks to Buy Most Milling Wheat in Three Months in Tender
  • Zinc Premium Said to Be Steady in Past Month During Supply Talks
  • Onions Bring Tears to RBI’s Rajan as Prices Surge: India Credit
  • Rio Tinto, Paladin Uranium Mines in Namibia Face Water Shortage
  • Rebar Advances in Shanghai on Lower Stockpiles, Demand Outlook



























The Hedgeye Macro Team














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.

Information Revolution

This note was originally published at 8am on November 05, 2013 for Hedgeye subscribers.

“The mechanization of ginning, spinning, and weaving the cotton launched the industrial revolution.”

-Jack Weatherford


The cotton gin was 1793. Twitter was 2006. Eli Whitney and Jack Dorsey had more than a few things in common. One was their age (Whitney was a 28 yr old teacher and Dorsey was a 29 yr old web developer/failed shoe salesman). That’s where revolutions come from, baby. As my man Brandon Flowers wrote in “Only The Young” (great tune):


“Look back in silence; the cradle of your whole life. There in the distance, losing its greatest prize. Nothing is easy, nothing is sacred. Why? Where did the bough break? It happened before your time. Only the young can break away, break away…“


And so it continues to begin – the unearthing of every single Western academic dogma about economics and markets ever spun. The unraveling of a weave of storytellers that only my God can be smiling down upon as stronger currencies lead new peoples to the promise land of purchasing power. Behold, the Information Revolution in financial markets is here!


Back to the Global Macro Grind


Tomorrow at 11AM EST, Hedgeye veteran blue-liner, Daryl Jones, and Hesham Shaaban will host a Black Book conference call on the Twitter IPO (if you’d like information on how to access the call, ping Sales@Hedgeye.com). It’s a fascinating story within the history we are building here @Hedgeye. I see it as our Trojan Horse in taking down the #OldWall of aforementioned dogmas.


Mr. Market, take down that #OldWall!


How is that going to work? Let’s just look at what we did using Twitter yesterday in order to front-run a ridiculous #OldWall financial media meme that the Fed being on taper-hold is a “good” thing for growth:

  1. All research starts with asking the right question – our clients often ask, “Isn’t #RatesRising Bad for Growth?”
  2. So we created a video answering that simple question with a simple answer @HedgeyeTV:  http://www.youtube.com/watch?v=BthNo_F6yvQ
  3. And we went on to answer two more big client questions we have been getting, then tweeted it (and re-tweeted it)

In the stone age of perceived financial market and economic wisdoms, you didn’t have Twitter, Videostreaming, YouTube, etc. So you actually had to take the government’s (and the banks they bail out) word for it on these economic history matters.


Ginning, spinning, and weaving, these academic dudes (and dudettes) who have never risk managed markets can get really creative. So was Karl Marx in introducing the adored Obama concept of #ClassWarfare in the first sentence of the Communist Manifesto.


And who the heck am I to call these people out? Sometimes I feel like a modern day version of some Iroquois or Creek Indian who is sitting here creating things (like cotton and rubber - you know, the stuff all the white dudes actually started to use). But what do I know?


What do you know?


The more I read, the less I know. So, admittedly, I do get a little frustrated to see central planning bureaucrats like Jim Bullard @FederalReserve on Big Government Intervention TV spewing economic forecasts that are rarely right, but never in doubt.


At one point yesterday @CNBC, Bullard actually said that it’s time Americans see QE (money printing, Dollar Devaluation, and 0% rates of return on your hard earned savings accounts) as a “normal policy position.”




Go back to that Iroquois style @HedgeyeTV video Darius Dale and I did and see the next popular client question: “How Concerned Are You About A Major Dislocation in the Credit Markets?”


Bullard, dude, there is nothing normal about credit markets that go no-bid when a bond ticks down half a point. Wake up man. You and your boy Bernanke have a “new normal” alright. It’s called a MBS bond bubble that people can’t get out of!


In other counter-Keynesian-consensus-dogma-economic-news this morning:


BREAKING: UK Services PMI for OCT hits a 16yr high at 62.5


Huh? With austerity and a #StrongerCurrency (we’re long the British Pound) the United Kingdom is seeing #GrowthAccelerating? You bet your Danny Blanchflower (Dartmouth Dogma professor of Currency Devaluation and Big Government Spending) it’s accelerating.


This morning, to be sure on my historical account, I went back to the time period I reviewed with my kids this weekend in the movie “Free-Birds” (where turkeys try to turn back the clocks on being slaughtered for Thanksgiving), and the replay still shows that there has never been a country that has devalued its way to long-term economic prosperity. Danny, you can’t turn back the clock. Gobble, gobble.


#StrongCurrency = Deflates The Inflation and real (inflation adjusted) consumption #GrowthAccelerating.


On the margin, that’s Europe now (not the USA –it was the USA 10 months ago):

  1. Swiss Consumer Prices (CPI) drop to -0.3% y/y in OCT = consumption tax cut for consumers
  2. Eurozone PPI (producer prices) drop -0.9% y/y in SEP = cost of goods tax cut for producers (good for margins)

And on what planet are Old World pundits allowed to fear-monger you that Deflating The Inflation is a bad thing? I guess maybe Pluto, Dartmouth (sorry guys, I’m picking on Blanchflower), or one that doesn’t have Twitter. Good luck keeping that one alive. As another revered American revolutionary, Martin Luther King Jr. reminded us, “a lie cannot live” forever.


Our immediate-term Risk Ranges are now:


SPX 1745-1774

DAX 8918-9055

Swiss Market Index 8159-8232

USD 80.17-80.98

Euro 1.34-1.36

Pound 1.60-1.62


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Information Revolution - Chart of the Day


Information Revolution - Virtual Portfolio


Takeaway: We remain bullish on the British Pound.

Our bullish call on the British Pound was borne out of our Q4 Macro themes call.


We believe the health of a nation’s economy is reflected in its currency. Likewise, we remain bullish on the regime change at the Bank of England, replacing Governor Mervyn King with Mark Carney.


If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.




(Editor's note: This is a brief excerpt from Hedgeye research. For information on how you can subscribe click here.)

RAI E-cig Update: The Migration To Smoke-Free Tobacco Is Underway!

RAI’s Investor Day this morning, while comprehensive in updating the entire portfolio, focused on the launch of its electronic cigarette (e-cig) VUSE.  In fact, the majority of questions (~ 12 of 15) asked following prepared remarks (from analysts and the investor community) centered on e-cigs. This further confirms to us that while e-cigs make up a tiny fraction of Big Tobacco’s portfolio (approx. 1%), the interest in and investment behind the e-cig category will remain a major focal point. We expect that investors will overweight e-cig results in gauging broader company performance as expectations continue to ratchet higher that e-cigs can replace declining traditional tobacco volumes (expected to be ~4-5% in 2013).


Position: We remain extremely bullish on the potential growth of the e-cig category. Our preferred Big Tobacco play remains Lorillard (LO), given its leading share in the e-cig category (~50%) and advantaged menthol portfolio.   


Highlights of RAI’s presentation section on e-cigs:

  • RAI CEO Daan Delen says the consumer migration to smokeless is underway, anchored on:
    • Harm reduction awareness; affordable price; enjoyable experience
  • Consumers have a wider variety than ever of non combustion offerings:
    • Nicotine replacement, dissolvables, snus, moist snuff, and e-cigs
  • Delen describes e-cigs as high consumer interest, but low adoption, in a fragmented category, with product quality and performance issues, but poised for substantial growth if consumer expectations (for the overall experience) are met

On the Product (VUSE):

  • Rolled out exclusively in the state of Colorado in July
  • Expects nationwide distribution by mid-2014
  • Seeing strong Awareness (83%), Consideration (68%) and Trial (48%), but exclusive adoption of e-cigs only 1.4%
  • Similar demographics (age, gender, ethnicity)  and income and education between e-cig users versus traditional cigarette smokers (charts from RAI presentation below)
  • Calling VUSE a “Digital Vapor Cigarette”, not an “e-cig”
  • Available only in rechargeable format (belief in razor-razorblade model to be margin enhancing over time)
  • Packaging design dissimilar to traditional cigs. Has “smart light” at tip to signify when to replace (shuts off after 200 puffs =~ 1 pack of trad. Pack) to ensure quality and signals battery strength
  • Selling only single replacement cartridges per pack to mimic traditional smokers who typically buy by the pack  (versus 5,10, 15, 20 replacement cartridge pack offered from competitors)
  • Assembled in the U.S.A.
  • Safety measures around battery and recharging safety
  • Treating e-cigs like a tobacco product (in marketing, advertising, and age restrictions)
  • In Colorado, VUSE #1 e-cig brand, 60%+ share (said supply could not keep up with demand)
  • No definitive plans to move internationally, focused on U.S. rollout first
  • On FDA, said company has no idea what deeming regulation could be handed down. Confident that whatever is passed, VUSE will stand ahead of the pack due to its quality control


VUSE and E-cigs in Context:

Note that Altria (MO) also recently issued its own e-cig, MarkTen, in August.  Both MO and RAI’s e-cigs distribution lag LO’s purchase of Blu in April 2012. We’re clearly seeing Blu enjoying first-to-market advantage, and taking significant market share in the category (from 40% to 49% in the last quarter alone), albeit on severe promotion and discounting. Given RAI and MO’s entrance, we’d expect more price wars as all try to stoke trialing and achieve brand loyalty.


We continue to see e-cig manufacturers favor the razor-razorblade model of a rechargeable unit and replacement cartridges to disposable e-cigs (the private manufacturer NJOY is one big exception among major distributors), with expectations that they’ll be margin enhancing.  However the point on when, given the infancy of the category and desire by manufacturers to increase trialing, remains unanswered.


Another wild card remains when and to what degree the FDA will regulate the e-cig category.  The agency was expected to announce regulations last month—the government’s shutdown may or may not have moved the goalposts. It’s anyone’s guess now just when that may happen, however manufacturers continue to expect something before year-end.  


It’s our opinion that the FDA wants to protect the consumer, while not stifle e-cig innovation that can ultimately lead people away from the harmful combustible cigarettes. A few of the larger regulations expected to be addressed are online sales, flavors, and marketing, however regulations could go much further. It appears the science on e-cigs remains incomplete, which would suggest to us that the agency may err on the side of less regulation versus more regulation until the science is (more) conclusive.  


RAI E-cig Update: The Migration To Smoke-Free Tobacco Is Underway! - z. ecig1M


RAI E-cig Update: The Migration To Smoke-Free Tobacco Is Underway! - z.ecig2


Matthew Hedrick