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Carnival Barkers

Client Talking Points

THE FED

So Ben Bernanke spoke at the Keynesian Central Planning Club of Washington D.C. yesterday. He basically did more of what we have come to expect from him (no December taper... Change the goal posts on tapering targets). Surprise, surprise. The Dollar is down again this morning (FYI - it's down -1% on the US Dollar Index since Yellen spoke last week.) Bernanke thinks the “surest path to economic recovery” is to do more. He’s sure about that. And that’s the problem.

US DOLLAR

After failing right at its $81.39 Hedgeye TREND line on Yellen Day, it will be interesting to see if the USD can bounce to another lower-high from here. I think those buying dollars in hopes of a December taper are going to be as wrong as those who bought into the idea that “Yellen will be more hawkish than you think." She’s the Mother of all Doves. Deal with it.

OIL

Oil has completely lost its USD correlation (for now). Our TAIL risk line of $108.69 on Brent remains resistance. We’re short Oil and looking for $103.68 Brent next. Russian stocks lead the losers on weak oil this morning. The RTSI is down -1.3% and back down to -2.1% year-to-date.

Asset Allocation

CASH 60% US EQUITIES 6%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 22%

Top Long Ideas

Company Ticker Sector Duration
FXB

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

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.

TROW

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

TWEET OF THE DAY

Voluntarily repaying a revolver is not behavior one might expect from a company about to file Ch 11. Sorry $JCP bears. @HedgeyeRetail (Brian McGough)

QUOTE OF THE DAY

I haven't celebrated coming in No. 2 too many times.
-Mark Messier 

STAT OF THE DAY

J.C. Penney reported a larger-than-expected quarterly loss this morning, but the ailing retailer said there will be continued improvement in sales during the current quarter. Shares of J.C. Penney jumped more than 9% ahead of the opening bell.



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.”

 

Pardon?

 

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.”

 

Indeed.

 

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%

SPX 1

VIX 11.85-13.88

USD 80.48-81.36

Brent 103.68-108.69

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Great Machine - Chart of the Day

 

The Great Machine - Virtual Portfolio


Early Look

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$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. Dot.com 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


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?”

-Unknown

 

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.

 

#cool

 

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.

 

Why?

  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,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Fed's English - Chart of the Day

 

The Fed's English - Virtual Portfolio


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