“Whenever you feel like criticizing any one . . . just remember that all people in this world haven’t had the advantages you’ve had.”
-F. Scott Fitzgerald
Yesterday, I read a great column in the New York Times by Nicholas Kristof about compassion and empathy. The point of the article was to look at the distinction between asking someone to be personally accountable versus recognizing in a civil society that it is our responsibility to help others.
The origin of the article was based on some comments Kristof had received from a number of recent columns he’d written on the federal food stamps program. The gist of the feedback was that we shouldn’t be subsidizing families that are “too lazy” to take care of themselves. As Kristof writes:
“Let’s acknowledge one point made by these modern social Darwinists: It’s true that some people in poverty do suffer in part because of irresponsible behavior, from abuse of narcotics to criminality to laziness at school or jobs. But remember also that many of today’s poor are small children who have done nothing wrong.
Some 45 percent of food stamp recipients are children, for example. Do we really think that kids should go hungry if they have criminal parents?”
The current public debate over healthcare personifies this dilemma we face when trying to emphasize with those that were given less in life. (Unfortunately, the inability of the government to execute on the implementation of Obamacare has somewhat tainted this debate.)
In “A Theory of Justice” the philosopher John Rawls proposed the veil of ignorance to help us in determining our role in helping others and as a way to find morality in many situations. According to Rawls, under the veil of ignorance:
“No one knows his place in society, his class position, or social status; nor does he know his fortune in the distribution of natural assets and abilities, his intelligence and strength, and the like.”
As a result, since a person may occupy any position in society after the veil is lifted, the person must then evaluate any position from all perspectives of society.
Certainly, the idea that I could wake up one day and not be preparing for a festive thanksgiving with friends and family, but rather be a homeless person wandering the icy streets of New York provides a different perspective as to how to treat those that are less fortunate.
Back to the global macro grind...
As it relates to the U.S. equity markets, today is a day that is a bit of a market veil of ignorance as it is historically is the lowest volume trading day of the year. As a result, there probably won’t be a lot of read through from the market action today. Internationally, there has actually been a slew of data out over the last 24 hours and some key points to highlight include:
In aggregate the big macro data points this morning do not point to any reason for the policy makers in Japan or Europe to change their views. If anything, there is only increased support for the current extremely dovish policies that are in place.
As it relates to Japan, though, late last week we actually encouraged investors to consider taking off the Abenomics trade, as my colleague Darius Dale wrote there are a number of reasons to consider booking gains, namely:
In my purview the point on sentiment may be the most compelling reason to take a break on the long Japan equity trade. Specifically, in the YTD, foreigners have purchased a net ¥13-plus trillion of Japanese shares – the highest total on record. This contrasts with a net ¥6T of net sales amongst Japanese institutional investors.
Moreover, the aforementioned foreign/domestic bifurcation has intensified in recent weeks. The most recent weekly data shows a net purchase of ¥1.3T by foreign investors, which represents a 7M-high. Conversely, net sales of domestic assets by Japanese retail inventors hit ¥174B last week – the largest weekly divestment since 2008.
I think we can all agree, buying when the locals are selling is rarely a good thing!
Switching gears, in the chart of the day today we highlight a key point from our expert call last week with Dr. Tancred Lidderdale from the Energy Information Administration. As the chart shows, for the first time in more than twenty years, U.S. production of crude oil has surpassed imports. Arguably, even the environmentalists when wearing the veil of ignorance would agree that increased U.S. oil independence is a good thing.
I’ll be heading to my first Apple Cup later today, which is the annual match-up between Washington University and Washington State in Seattle. Wherever you spend the rest of the holiday weekend, I hope it is a great one.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.69 - 2.82%
VIX 11.91 - 13.31
USD 80.35 - 81.15
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
TODAY’S S&P 500 SET-UP – November 29, 2013
As we look at today's setup for the S&P 500, the range is 19 points or 0.68% downside to 1795 and 0.37% upside to 1814.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
This note was originally published at 8am on November 15, 2013 for Hedgeye subscribers.
“Much of the profession is empirically bankrupt because it is no longer taught economic history.”
That quote comes from Chapter 12 “The Scandal of Money” (pg 115) in one of the only forward thinking economics books of 2013 (George Gilder’s Knowledge and Power). It’s market practitioners like me vs the government PH.Ds. And it’s on.
The reason why Gilder gets it is that he combines the weaponry of A) economic history and B) math (chaos theory). The late Charles Kindleberger, of course, wrote one of the most important market history books ever (Manias, Panics, and Crashes) in 1978.
Keynesian economists (who Kindleberger alluded to as “the profession”) don’t do non-linearity, entropy, etc. They are all about “smoothing” cycles, and “equilibrium” (or something like that) which are designed to promise the end-user (Big Government Interventionists) certainty. NEWSFLASH: markets, bubbles, and economies are grounded in uncertainty. Embrace it.
Back to the Global Macro Grind…
If you don’t get what I am talking about, take a few minutes to watch and listen to Janet Yellen’s confirmation hearing yesterday. Watching a human being’s body language is always as important as attempting to listen to what it is they are trying to say.
If you don’t want to study the kinesics of it all (the study of lying) or read economic history, read my friendly competitor’s (Zervos) rant yesterday about how he loves Yellen. There’s no math or history in his analysis; it’s all about the storytelling.
Critical to #KeynesianCrack storytelling is the fear-mongering and the emotion of it all. Just so you know the difference between our perspectives, David Zervos is a Ph.D. who worked for the Federal Reserve in Washington, D.C. I’d boil down his backslapping of his groupthink tank’s (The Fed’s) anti-dog-eat-dog-economic-cycle-gravity-banning-central-planning idea as follows:
Like many in Washington, he’s entertaining – and he gets markets right too. But how he thinks this all ends for America, her former “free” markets, and economy is about as far off on another planet as I’ll ever be. To him, I’ll sound crazy this morning.
Calling our kings and queens crazy? People often ask me what I’d do differently if I was at the Fed. Since I’m not the central planning type, I’d either do what Volcker did (end the madness of stagflation policy), or just shut the place down.
People also ask me what I’d ask our almighty Federal Reserve Ph.D.’s if I was in Congress. Well, since I have never voted for a politician in my life, I doubt being in Congress is in the cards, but here are some questions for my friends sipping the Keynesian chartreuse:
Traditional anti-Marxists would call trying to mark markets to some damn “optimal” model and/or price floors just plain dumb. But I won’t do that this morning. I am Mucker. How dare I challenge a Ph.D. “science” of charlatans?
Yes I called them charlatans. If you don’t think I’m crazy yet – watch this video I made for my Washington friends yesterday titled #Yellen: Tools, Crickets, and Crack: http://app.hedgeye.com/media/697-yellen-tools-crickets-crack?media=all&page=1
Yep, too many pucks to the head. But before these Ph.D.’s bubble (and blow) up markets for the umpteenth time in world history, I’ll be standing on the front lines against their academic dogmas. Yes, Mr. Zervos – I’m the one who knocks.
Back to how we risk managed the event risk of Yellen being who she is (The Mother of All Doves), we made the playbook move of buying slow-growth Yield Chasing assets that drive what Jefco calls the “spooooz” higher.
But do not mistake Gold, Bonds, and Utilities leading yesterday’s short squeeze to another all-time US stock market (SPY) high for rising growth expectations (the Russell Growth Index was down). Remember, a Policy To Inflate nominal is not real economic growth.
Oh, and I sold all my Gold and Bonds by 11AM EST. Yellen’s darting eyes toward Nero Corker (the Keynesian overlord from Tennessee) did me in. I just couldn’t stomach being long their empirical bankruptcy for more than a few more hours. Keep moving out there!
Our immediate-term Risk Ranges (its math – we have 12 Big Macros in our Daily Risk Range product) are now:
UST 10yr Yield 2.66-2.81%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Happy Thanksgiving! You never know, as you dive into your second helping of mashed potatoes and gravy, the topic at the table could well be electronic cigarettes!
Below we want to provide recent updates and developments in the category. In our work we continue to express great excitement in the growth prospects for the e-cigs, despite its current diminutive size (~ 1% of the tobacco market). That said, we expect consumer interest in and investment behind e-cigs to grow, especially following “Big Tobacco’s” entrance into the category. We think innovation will be a critical component to drive trial and adoption, as improvements in the form, function, and performance of next generation e-cigs meet the combustible cigarette experience. However, with respect to innovation, and the broader size and shape of the category, much depends on the details of pending regulation from the FDA (more below).
In terms of excitement and interest in the category, just last week Wells Fargo and Morgan Stanley held the first annual e-cig industry conferences, in which both management teams from Big Tobacco and select private manufacturers were featured, including NJOY, Victory, and Ballantyne Brands, which we’ve held conferences calls with in recent months. We believe the interest in this new disruptive category is built on:
We expect that these factors will encourage investors to overweight e-cig results in gauging broader company performance as we look out to the coming quarters.
Investment Position: Our preferred Big Tobacco play remains Lorillard (LO), given its leading share in the e-cig category (~50%) and advantaged cigarette portfolio. We expect LO to continue to see outperformance on strong demand for its full-flavored offerings and dominate share of menthol (~85% of its portfolio), both of which are contributing to volume outperformance versus the industry (in the quarter LO’s vol. +3.5% versus industry’s avg. -4%). The company continues to push gross profit margins higher, improving 80bps to 37.1% in the quarter as domestic retail share of menthol rose.
LO was the first Big Tobacco company to market through the acquisition of “Blu” branded e-cigs (in April 2012 for $135MM) and saw strong sales growth of 11% quarter-over-quarter (+350% year-over-year) to $63MM. LO CEO Murray Kessler’s e-cig strategy appears to forgo short-term profits for long term gains: he sold e-cigs at break-even in the quarter and was able to boost Blu’s market share to 49% from 40% last quarter. We expect similar trends as LO tries to capture brand loyalty. Over time, we do think that e-cigs can be margin-enhancing to the combined cigarette category. Further, the company became an international e-cig dealer through its purchase of UK-based SKYCIG in October 2013 for £30MM in cash, plus an additional £30MM to be paid in 2016 based on the achievement of certain financial benchmarks. SKYCIG is a three year old company with ~ 300,000 users in the UK (there exists around ~ 10MM smokers in the country) that also happens to have nearly identical branding to Blu.
A Changing Marketplace
Awareness, Adoption and the E-Cig User
This note was originally published at 8am on November 14, 2013 for Hedgeye subscribers.
“Where is the knowledge we have lost in information?”
That’s the opening quote from the latest book I cracked open on an airplane this week – The Idea Factory, by Jon Gertner. I did 3 cities (Kansas City, Denver, and Minneapolis) in 3 days and came up with a new idea for the next crisis – prayer.
Whether you like it or not; whether you have realized that the Fed completely missed its opportunity to taper or not; whether you agree that the US government is getting dumber with market and economic information or not – newsflash: it doesn’t matter.
All that matters today is what the next un-elected-central-planner-in-Chief-of-your-hard-earned-currency thinks. While hope is not a risk management process, many still hope Janet Yellen won’t be as “dovish” as Bernanke. If she walks and quacks like a dove, she’s not a hawk. She will redefine a new species of accountability ducking doves.
Back to the Global Macro Grind…
In textbook Fed front-running form, the US stock market got a leak intraday yesterday as to what Yellen was going to say and ripped to another new all-time high. Gold and Bonds went up too. Everyone was a winner!
But who is everyone?
I think we all know the answer to that question. And this, sadly, is not a new idea in the world either. Marxist/Socialist political regimes have plundered The People across centuries. The power of information is no longer in entrepreneurial ideas, it’s in having insider knowledge on the next central plan.
Since Obama didn’t get the asymmetric risks embedded in Obamacare, there’s less than a 1% chance he will be in the area code of comprehending the long-term TAIL risks associated with the Bernanke Bond Bubble. But don’t worry about that, for now. Buy the damn bubble (#BTDB), and pray you aren’t the one without a chair when the music stops.
I’m not kidding, as my Canadian sniffer caught a downwind leak of the Yellen’s pending plan, I:
In other words, I bought everything that I was short for the better part of the last year on my other 2013 New Idea that the Fed was going to finally get out of our way (and taper).
Do you think I’m crazy? I do.
In fact, I spread a full 1/3 of the Hedgeye Asset Allocation across 4 asset classes at 8% each. Crazy Eights!
With a little dovish leaky-peaky from the boys who worked for and/or hang with Dudley’s Goldman boys at the New York Fed (I believe they are all old and young boys, but don’t quote me on that), why not roll the bones? Spreading our bets around a casino where everyone wins takes down our “VAR” too!
People who don’t make money in down markets love to talk about “Black Swans”, but they have yet to make it a known known to The American People that this eventual bond market crash isn’t a TAIL risk at all. Our risk management process considers it a rising probability in 2014-2015.
And what are all the poor souls who are long the PIMCO “total return” fund going to do when they realize that it was lathered up with the a sub-asset “class” within the Bernanke Bond Bubble that people won’t be able to get out of (MBS)?
Or was the plan always that the New York Fed was going to buy the Bond Bull Lobby time to get out? Was the plan to change the goal posts every time non-linear economies surprise these central planners’ forecasts? Evidently, it was.
So pull up a seat. Meet your maker -Janet Yellen - the Mother of All Doves. She’ll outline why, despite the USA running +2.84% GDP in Q313, that her unaccountable definition of the economy is “far from potential.”
She’ll make up some new rules. She’ll look real serious about it too. Because when her MBS (mortgage backed security) bond bubble pops, this is going to be very serious. That’s why my best New Idea is recommending prayer.
Our immediate-term Risk Ranges are now:
UST 10yr Yield 2.66-2.82%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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