The Great Machine

“Unlike an inexorable, Newtonian “great machine”, the economy is not a closed system.”

-Geoger Gilder


That’s a quote from the end of lucky chapter 13 of one of the best markets/economics books of 2013, Knowledge and Power, by George Gilder. I like this book because it’s the precise opposite of what your central planning overlords @FederalReserve think.


Yesterday, at the Keynesian-economics-Club-of-Washington-D.C. event, Ben Bernanke proclaimed his mystery of faith to his head nodders: “the surest path to recovery” is for the Fed to do more (read: no taper).


Right, right. It’s a good thing he’s sure.


Back to the Global Macro Grind


This, of course, is the basic divide between how most of us market-practitioners think about markets/economies versus some un-elected and unaccountable academic theorist does. Core to Fed group-think is certainty whereas what we do is embrace uncertainty.


Markets and economies aren’t some theoretical “great machine” that behaves in “equilibrium.” Markets and economies are dynamic and non-linear. Anyone who has studied history understands that.


I’ve been on the road seeing clients in Los Angeles and San Francisco this week. I’ll be in Vegas tonight and Phoenix tomorrow. No matter where I go, I get the same feedback from market-practitioners about Fed policy – uncertainty.


At the same time, these dudes (and dudettes) backslapping one another at the Fed think that they have this completely under control. At one point yesterday, Bernanke said that his “forward rate guidance is helping the economy.”




Taper, no-taper, taper, no taper, maybe-taper, no taper, change goal posts on taper, don’t taper…


It’s a certified circus at this point.


The smartest investors I meet with have the humility to tell people that they have no idea how this ends. So that’s comforting, right? Not only one of the sharpest clients we have, but one of the best performers in 2013 YTD, summarized that this he-said-she-said-taper-talk thing has given him a tremendous amount of conviction in one position – cash.


“Keith, with all of the illiquidity and policy risk factors building out there, I really like cash.”




After effectively day-trading Yellen’s predictable behavior last week, I’ve gone from 48% cash in the Hedgeye Asset Allocation Model to 60% this morning. But I was at 66% cash yesterday morning, and bought-the-damn-bubble in a few things on red again yesterday.


Day-trading? Yep. I have no problem with that. Do you? #GetActive


I realize its below these uber intellectual types at the “Economics Club of Washington” to risk manage (read: trade) the market risk they are superimposing on us every day. And I kind of like that. Maybe they’ll label me a lower-class-trader, or something like that.


Moving along…


What’s my call? It’s been a fantastic year to be long US #GrowthAccelerating (from 0.14% GDP with the SP500 at 1360 in Q412 to 2.84% GDP Q313 and US stocks at all-time highs), and now, on up days, it’s time to raise cash.


Looking at both real-time market indicators (Russell2000 growth has been making lower highs since locking in its all-time high on October 29th) and high-frequency economic data, it appears to us that the slope of the line on US growth is peaking.


Since what happens on the margin matters most, if and when the US economy slows (from here) to say 2% (or 1.6%, which is now the downward bound in our GIP model for US GDP Growth in 2014), what do you think the top performing Style Factor in US Equities (GROWTH) is going to do?


No worries, you don’t have to guess – that style factor is already starting to do what you should expect it to do – slow. As US equity market momentum slows (on lower and lower volumes), both the Fed and its nodders are going to get lulled to sleep.


Moreover, I think the Fed will cheer on the #GrowthSlowing data as more reason not to taper… and, in doing so, they’ll suck in every last lemming who hasn’t been long US stocks in 2013 to buy the bubble.


How messed up is that? I have no idea on timing, but oh how this “great machine” of Keynesian certainty is going to fall.


Our immediate-term Risk Ranges are now as follows:


UST 10yr Yield 2.67-2.81%


VIX 11.85-13.88

USD 80.48-81.36

Brent 103.68-108.69

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Great Machine - Chart of the Day


The Great Machine - Virtual Portfolio

$JCP: McGough Called It Right

(Editor's note: This JCP summation comes from Hedgeye Retail Sector Head Brian McGough. The stock is up over 5% in pre-market trading.)


As expected, there’s good and bad in the JCP quarter, but the net read is positive. What we were looking for was improvement in both the P&L and the balance sheet, and we got ‘em both.


1)    The bad, Gross margins were down 300 basis points in the quarter, as JCP cleared away inventory overhand from 1H and stepped up its promotional cadence.

2)    The good news is that promos worked, and sales improved sequentially throughout the quarter. sales were up 24.5%.

3)    EPS of ($1.81) missed the Street’s ($1.70) but the reported number includes a $0.73 loss associated with a tax valuation allowance.

4)    JCP voluntarily repaid $200mm on its revolver. That’s not behavior one would expect from a company about to file Chapter 11.

5)    Guidance for 4Q includes; 1) additional sequential improvement in top line and gross margin – and both positive vs last year, 2) DOWN sg&a versus last year, and liquidity to be in excess of $2bn.

6)    That final point on liquidity is the most important. The big bears out there had estimates for year-end liquidity of $1.5bn to $1.8bn. Again, companies with stocks going to zero don’t take up liquidity estimates.

7)    Our bet is that a third of sell side noted share the same title today ‘turning a corner’. This will be the quarter people will point to in hindsight as evidence that JCP is actually a viable company.


FLASHBACK: Here was McGough's take last week ahead of the report.

November 20, 2013

November 20, 2013 - dtrja

Early Look

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The Fed's English

This note was originally published at 8am on November 06, 2013 for Hedgeye subscribers.

“Why do we have noses that run and feet that smell?”



The Fed’s English can be confusing too. As you can see in our Chart of The Day, that’s what’s been driving unprecedented volatility in the US bond market this year. Confusion about @FederalReserve policy is starting to breed contempt.


But oh no, no, no – silly Mucker must have this all wrong. The Fed has a “study” that proves pretty much anything they want to prove. The latest data-mining propaganda coming out of the head of the anti-dog-eat-dog-Fed-Monetary-Affairs-Division, William English, insinuates that it’s time for Bernanke and Yellen to move the goal posts again on the unemployment target. #Wonderful


Huh? This is what Bush/Obama empowered - an un-elected and un-checked central planning agency that is trying to prove out their academic dogma versus well established forces (like gravity). The Fed can pretty much keep making up the rules as they go here until the entire Bond Bubble blows up. Isn’t that awesome? History will write plenty of English “papers” on this!


Back to the Global Macro Grind


Since the Fed was wrong on its US growth forecast again (this time they and #OldWall were too low at the beginning of 2013, and the bond market started front-running them as tapering expectations perpetuated the 2-stroke engine of #StrongDollar + #RatesRising), and the unemployment rate is getting too close to their policy change target of 6.5%, they need to change the target.




Or is it? I’ll be doing another full day of institutional client meetings in NYC today and I’ll tell you that (especially for clients who aren’t in the business of being levered-long bonds that they can’t get out of) this expectations game isn’t cool.



  1. 1.       Dollar Down + Rates Down = US Growth Expectations Down (see US economic history for details)
  2. For the last month, you’ve seen every growth “Style Factor” start to underperform slow-growth yield chasing
  3. If we’re going back to slow-growth yield chasing (long Gold, Consumer Staples, and Bonds) that’s a big shift

The Fed won’t have a “study” on this because that would prove that incrementally dovish policy does 2 things:

  1. Devalues America’s Currency (which they are supposed to be protecting)
  2. Represses rates and growth expectations (as Dollar Debauchery perpetuates inflation, not real-growth)

All the while, the same western academic dogma that we imported from Europe remains in parts of Europe. This morning’s central planning bureau headline out of Italy’s Finance Minister is begging Mario Draghi to cut rates and devalue the Euro!


To review, from December 2012 to August 2013, a #StrongCurrency policy (tapering):

  1. Crushed inflation expectations
  2. Ramped real (inflation adjusted) growth expectations

But these damn bureaucrats see that very Deflating of The Inflation (from the world’s all-time high inflation readings of Gold and Food prices in 2011-2012) as a threat to their failed policies!


Moving along, I bought more exposure to our #EuroBull Macro Theme yesterday via:

  1. Eurostoxx50 Index (FEZ) which tested and held my immediate-term TRADE line of support
  2. Swiss stocks (EWL) which were holding support and have bounced a full +1% this morning

Why buy US Growth anymore if we’re going to let these clowns at the Fed blow up our currency again? This all started with Keynes in Britain, and even the British have given up on the QE thing (thank God) at this point. Carney (the Canadian who doesn’t do crack cocaine) replacing Mervyn King at the Bank of England is like replacing Bernanke with me (or something like that).


#StrongPound in the United Kingdom continues to perpetuate rising UK growth expectations. When growth expectations rise, government bond yields rise (bonds go down). The 10yr UK Gilt Bond Yield is +10 basis points in the last 2-days as the UK printed the best Services PMI reading in 16 years (UK industrial production growth just accelerated to +2.2% y/y as well).


The final point to be made this morning is that after perpetuating Gold, Bond, and Utility Bubbles with his 0%-interest-rates-forever thing (formally known in a Hedgeye “paper” as Yield Chasing), Bernanke is probably going to get tagged with creating another US stock market bubble too. Today’s II Bull/Bear Sentiment Spread just clocked a fresh YTD high at +3960bps wide to the bull side.


I am still recommending prayer for those at the Fed who still don’t yet know about the “paper” on the definition of insanity. The summary of the paper is in plain English too – doing the same thing over and over again, and expecting different results.


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.55-2.69%

SPX 1751-1771

DAX 8976-9058

Swiss Market 8113-8299

Pound 1.60-1.62

Gold 1301-1339


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Fed's English - Chart of the Day


The Fed's English - Virtual Portfolio

CPB – Praying For Strong Winter Soup Sales

Position: Tactically short on strength.

Campbell’s had a rough quarter to say the least; the stock is trading down -6% intraday on management lowering FY guidance.


Despite concerted efforts to reduce costs (CPB completed the sale of its European Simple Meals business, the exit of 4 plants in the past two years, and plans to save an additional $40 in FY 2014) we struggle to get behinds CPB’s plan to increase its marketing spend (and likely promotion) as it accelerates the launch of eight new soups in the next two quarters (Fiscal Q2 and Q3). The drivers under the hood suggest further top-line pressure on increasingly more difficult comps and continued gross margin and operating margin pressure over the next two quarters.  We also don’t think the company has not hit the mark on soups, launching hearty and healthier higher premium soups that look to be missing on the consumer’s value perception given the still very strapped labor market and macro environment.   


In short, CEO Denise Morrison continues to under-deliver on her promise to turn around an ailing portfolio; US Simple Meals and US Beverages were clearly significant laggards in the quarter. Fiscal Q1 revenues of $2.17B fell -7.3% in the quarter (underwhelming consensus of $2.29B) and EPS declined -21% to $0.66 (vs consensus $0.86). Management attempted to explain away the decline citing unexpected light retailer inventory building and this year’s late Thanksgiving that will push more shipments into next quarter (Q2).


CPB is immediate term TRADE oversold and bearish on the intermediate term TREND.  Therefore, this is a name we’re not comfortable owning over the intermediate term, and may only tactically trade around it to take advantage of price imbalances.


CPB – Praying For Strong Winter Soup Sales - z.  cpb chart


Given the weakness in the quarter, CPB lowered it FY 2014 guidance: sale 4% to 5% (prior 5% to 6%); EBIT 4% to 6% (prior 5% to 7%); and EPS 2% to 4% or $2.53 to $2.58 (prior $2.58-2.62).


CPB – Praying For Strong Winter Soup Sales - z. cpb sales


CPB – Praying For Strong Winter Soup Sales - z. cpb operating


Matthew Hedrick


[VIDEO] Keith's Macro Notebook 11/19: $USD, UST 10YR, COMMODITIES

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