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Weird Bubbles

This note was originally published at 8am on November 18, 2013 for Hedgeye subscribers.

“If we’re in a bubble, it’s the weirdest bubble I have ever seen, where everybody hates everything.”

-Mark Andreesen


From both a US economic growth and stock market perspective (not one and the same thing), there was a lot of truth in Andreesen’s general statement – if he said it precisely a year ago (he said it on May 1, 2012 with the SP500 at 1406).


A full year ago today, the US economy was tracking 0.14% in the 4th quarter of 2012, US Treasury Yields were a full 100 basis points lower (10yr = 1.70%, all-time lows), and the SP500 was at 1360. So if you bought what everyone hated (growth), and shorted what everyone was clinging too (Gold and Bonds), you crushed it.


Does that make today a bubble? Or was there a bubble back then in fear? Up +32.2% from November 16th, 2012 is the SP500 a bubble? Barrons says “Yes” (in a few names), but “No” (in most names)” and our new central planning diva, Janet Yellen, says “No” (anywhere)… So I’ll agree with Andreesen - there are plenty of weird bubbles; some of the weirdest markets have ever seen.


Back to the Global Macro Grind


Most pundits and politicians who have never forewarned you of a bubble live in their own conflicted and compromised bubble. Most “market-equilibrium” people think bubbles are measured by “valuation.” And most market-practitioners call bubbles things that start to make lower-highs versus their all-time highs in price.


Well, maybe not most market-practitioners. But that’s how this one thinks. And yes, I’m perfectly happy to be in my own little bubble as a write about bubbles from my hotel room on the Santa Monica, California coastline this morning!


At the end of the day, calling something that’s up a “bubble” is about as useful as having another leg in a one-legged butt kicking contest. If you are going to run around trying to make news calling things bubbles, you better be short them, publicly, with timestamps.


To review what we have been calling the Bernanke Bubbles for the last year:

  1. Gold
  2. Bonds
  3. MLPs

MLPs are master limited partnerships. If you don’t know what those are, don’t worry about it. We’ll boil it down for you – they are the sub-asset class of equities that look most like a bond that slow-growth Yield Chasing investors have found tax refuge in.


All 3 of these bubbles have 3 things in common:

  1. They had almost bullet proof storytelling narratives that lasted on the order of 1-3 decades
  2. Their asset prices confirmed the storytelling (making higher-highs) until they all topped in 2011-2012
  3. They’re now all making a series of lower-highs as interest rates make a series of higher-lows

Now, as you all know, all-time is a long time. So this concept of US 10yr Treasury Bond Yields making an all-time low when US Growth expectations were bottoming in November 2012 can make for some exciting causal relationships.


The relationship between interest rates and 0%-rates-forever-bubbles isn’t weird at all. It makes perfect sense. That’s why the upside down of repressed growth expectations (US Growth Stocks) have bubbled up to bring the US stock market to all-time highs:


From a US stock market “Style Factor” perspective, check out the score:

  1. LOW YIELD (i.e. GROWTH) stocks = +40.4% YTD
  2. Top 25% EPS GROWERS (by SP500 quartile) = +37.2% YTD
  3. HIGH BETA stocks = +35.8% YTD

As my boy Jesse Pinkman would say, that growth stuff is “awesome!”


At the same time, the slow-growth-end-of-the-world-fear trade score for 2013 YTD is:

  1. US Equity Volatility Fear Index (VIX) = crashing -32.4% YTD
  2. Gold = crashing -23.6% YTD
  3. UST 10yr Bonds Yields = +54% YTD

In other words, there was this Weird Bubble in fear-mongering that consensus got sucked into last year that popped as everyone trying to call the top in a said “US stock market bubble” ended up being a bubble themselves.


US stock market bears hate that. Another way to measure their “hate” is how well short-interest has performed in 2013. As a “Style Factor”, High Short Interest stocks in the SP500 are currently +31.8% YTD, outperforming the SP500 by +570 basis points.


And that’s why I’ve been so quick to cover “growth” shorts throughout October. Holding the bag on a bubble of fear isn’t exactly how I roll. Neither is holding onto the long side of bubbles (like Gold and Bonds) that are still very much in crash mode.


My holding period on Gold was 72 hours. And I’m not going to apologize for that. I had my catalyst (Yellen being who she is) and I booked that small gain on the event day. I cut my “crazy eights” exposure to both US stocks and bonds in half on that too.


Bubble or no bubble. Weird or not weird. Mr. Macro Market couldn’t care less what we think about markets. He is designed to punish the largest amount of people (consensus) at the most inopportune time. So #GetActive out there, and keep moving.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.66-2.81%

SPX 1773-1803

VIX 11.91-14.35

USD 80.54-81.39

Brent 106.04-108.69

Gold 1260-1308


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Weird Bubbles - Chart of the Day


Weird Bubbles - Virtual Portfolio


TODAY’S S&P 500 SET-UP – December 2, 2013

As we look at today's setup for the S&P 500, the range is 18 points or 0.49% downside to 1797 and 0.51% upside to 1815.                                                      










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.51 from 2.46
  • VIX closed at 13.7 1 day percent change of 5.55%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Fed’s Bernanke at “College Fed Challenge” in D.C.
  • 8:58am: Markit US PMI Final, Nov., est 54.3
  • 10am: ISM Manufacturing, Nov., est. 55.0 (prior 56.4)
  • 10am: Sept/Oct construction spending data released
  • 7pm: Fed’s Potter speaks to Money Marketeers in New York


    • House in session
    • House Oversight and Govt Reform Cmte hears from Washington, D.C., planning officials on whether to alter a 1910 federal law restricting building heights in the U.S. capital
    • Biden visits Japan as part of Asia trip w/ China air-zone issue in forefront


  • Amazon testing drones for same-day package delivery: CBS
  • Black Friday weekend spending drop pressures U.S. profit
  • ComScore says online holiday-to-date sales up 3% to $20.6b
  • NRF sees 141m shopping Thanksgiving wknd vs 139m y/y
  • Cyber Monday seen drawing 131m shoppers, up 1.6% y/y
  • U.K. fund mgrs press FCA for more disclosure on forex-rigging
  • GrainCorp CEO resigns after $2b ADM takeover blocked
  • ADM’s GrainCorp bid would’ve been blocked by others: Abbott
  • Ex-BP engineer begins first criminal trial from 2010 oil spill
  • Barrick’s Thornton said to seek China deal to rebuild miner
  • Panasonic in talks for auto parts makers in expansion hunt
  • Stakes for Obamacare raised as U.S. says repair goals reached
  • China’s manufacturing tops ests. in growth boost for Li
  • China sets IPO reform plan signaling end of listings freeze
  • Facebook in talks for 1st acquisition in India: Standard
  • PTTEP, Pertamina agree to buy $1.3b Hess Indonesia assets
  • UBS plans EU1.75b bonds buyback to lower funding cost
  • Euro-area manufacturing expanded more than estimated in Nov.
  • NYC derailment kills 4, may snarl commuter traffic


    • Ascena Retail (ASNA) 4pm, $0.32
    • Krispy Kreme (KKD) 4:03pm, $0.15
    • Thor Industries (THO) 4:15pm, $0.71


  • Gold Falls on Speculation U.S. Data to Boost Case for Tapering
  • Worst Raw-Material Slump Since ’08 Seen Deepening: Commodities
  • OPEC VIENNA: Ministers Expected to Arrive Today Before Meeting
  • Copper Declines Amid Signs Investors Are Shunning Raw Materials
  • Soybeans Rise to 10-Week High as Demand for U.S. Supply Climbs
  • Iron Ore Exports to China Decline From Port Hedland in November
  • Palm Oil Retreats a Second Day as Exports From Malaysia Decline
  • Barrick’s Thornton Said to Seek China Deal to Rebuild Miner
  • OPEC Inaction Masks Looming Supply Glut in 2014: Energy Markets
  • Stocks Triumph Third Month in Best Run Since 2009 as Gold Sinks
  • Robusta Coffee May Climb to October Level: Technical Analysis
  • Pirates Wielding Grenades Spur Japan to Ease Samurai-Era Gun Ban
  • EU Periphery Refineries Most Threatened by Closure: 2014 Outlook
  • WTI Crude Gains as China’s Manufacturing Growth Beats Estimates


























The Hedgeye Macro Team















The Economic Data calendar for the week of the 2nd of December through the 6th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



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Takeaway: Current Investing Ideas: BNNY, CCL, FDX, FXB, GHL, HCA, MD, NKE, RH, SBUX, TROW and WWW

In light of the holiday shortened trading week, we have chosen to highlight three timely, topical and potentially profitable investment ideas below that we sent out recently to our institutional clients. We will resume our usual stock updates next week.


We would like to take a moment to thank you for making all that we have set out to achieve here at Hedgeye possible. We’re going on 6 years since the founding of our firm. You have helped us create 50 jobs in America. More to come. For that we are grateful.


Enjoy your holiday weekend.


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Gold: Is It Time To Get Back In On The Long Side?

Right now may be a bit early, but gold is shaping up to be a compelling long idea heading into 2014 according to Hedgeye's Macro Team. Since the start of November, Keith has been trading gold with a bullish bias in our Real-Time Alerts signaling product. This is a marked shift from having traded gold with a largely bearish bias since late 2011. All told, we think a waning threat of tapering, at the margins, is likely to serve as a positive catalyst for the price of gold.



E-Cigs at the Thanksgiving Table

We continue to express great excitement in the growth prospects for the e-cigs, despite its current diminutive size (~ 1% of the $800B global tobacco market).  We expect consumer interest in and investment behind e-cigs to grow, especially following “Big Tobacco’s” entrance into the category.  We think e-cigs demonstrate truly disruptive and compelling innovation and are bullish on the U.S. and global runways for the category.



#Rates-Rising: A Current Look At Rate Sensitivity Across Financials

Our Financials Sector Team led by Josh Steiner and Jonathan Casteleyn present their latest thinking about rate sensitivity across the Financials sector. Rates will be your best friend or worst enemy. Steiner and Casteleyn look across the FIG sector for the names with the most quantified exposure, + or -, to rates.



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(Staying) Long the British Pound!

Takeaway: USD and EUR currencies wars suggest the Pound is the relative winner.

This note was originally published November 14, 2013 at 13:58 in Macro

Long GBP/USD (via the etf FXB)

(Staying) Long the British Pound! - 999

Our bullish call on the British Pound remains, an anchor of our Q4 2013 Macro theme of #EuroBulls presented on 10/11/13.  (Click here for our previous note “Get Long the Pound”)


We’re buyers of the cross above our TREND support line of $1.58 and long term TAIL support line of $1.56.  We could see the cross heading to the $1.65 - $1.70 range over the intermediate term. 


(Staying) Long the British Pound! - pound


In short, we expect currency wars to devalue the USD and EUR, and expect the British Pound to be the relative winner across both crosses. Here are some updated developments since the ECB unexpectedly decided last Thursday (11/7) to cut the main interest rate by 25bps to 0.25% that we think will boost our #PoundBullish call:

  • Continued signs that Bernanke/Yellen will burn the Greenback via delaying the call to taper (likely pushed out to March 2014); a very dovish Q&A from Yellen today (11/14) before the Senate Banking Committee suggesting the call to taper pushed further out.
  • Members of the ECB governing council suggesting further policy easing measures (since the cut):
    • ECB Executive Board member Peter Praet said negative interest rates could be adopted or assets purchased from banks if needed.
    • ECB Executive Board member Joerg Asmussen said that depending on how inflation develops, the central bank has not reached the lower bound on interest rates. He added that while he is wary of such a move, the ECB could also push the deposit rate into negative territory.
    • ECB Executive Board member Benoît Cœuré said that the central bank can further cut interest rates and provide the banking system with additional liquidity.
    • Austria’s Central Bank head and Governing Council member Ewald Nowotny said that the central bank's main concern is stagnation, not inflation. He added that unlike the Fed, the ECB had not yet reached the lower zero bound on interest rates.


In contrast, we expect sober hawkish policy from the BOE.  The UK was the first to issue austerity, which we think will continue to boost its growth profile above most of its European peers.  Improving economic data (more below) continues to confirm this position.  On policy, we expect interest rates to be on hold over the medium term, with expectation for a hike over the longer term, and the asset purchase program target (QE) to remain unchanged.  Both positions should strengthen the GBP/USD and GBP/EUR. 



Improving UK Data This Week:

BOE’s  Inflation Report-

  • brought forward the likelihood of 7% unemployment rate to Q3 of 2015
  • raised 2014 GDP forecast to 2.8% from 2.7%

High Frequency Data-

  • UK Retail Sales 1.8% OCT Y/Y vs 2% SEPT
  • UK ILO Unemployment Rate 7.6% SEPT vs 7.7% AUG
  • UK Jobless Claims Change -41.7K OCT vs -44.7K September
  • UK PPI Input -0.3% OCT Y/Y (exp. 0.1%) vs 0.9% SEPT
  • UK CPI 2.2% OCT Y/Y (Exp. 2.5%) vs 2.7% September.  We expect this move downward in inflation to aid consumer spending. 

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Consumer Staples Highest Conviction Ideas - Longs & Shorts

With a good majority of consumer staples companies having reported their quarterly results, below we give a round-up of our highest conviction ideas on the long and short sides over the intermediate term TREND.


Looking back at the quarter it’s interesting to note that while some things changed versus Q2 most remained the same. Here’s our update:

  • Valuation remained elevated: the Consumer Staples sector remains richly valued, with P/E at 18.9x, or two standard deviations above the five year mean of just under 15x (see valuation charts below).
  • The Fed’s Easy Policy: the reversal of our Q3 Theme call of #RatesRising has encouraged investment back into the yield chasing Consumer Staples sector. We expect this development to continue into the remaining weeks of the year and into the beginning of next year. From our purview, we expect Yellen to remain the ueber dove on policy and push out any QE taper expectations to at least late in Q1 2014.
  • The Macro Is Still Impactful: food and beverage companies such as KO, KRFT, K, and GIS (to name a few),  continued to site a challenged macro environment, be it continued weakness in Southern Europe and slower growth in the emerging market (China and Brazil in particular). Spirits and tobacco companies have cited lower demand due to a hangover of weaker economic and consumer confidence across geographies.
  • Policy Impacts: looking at the spirits companies, for example, China recently banned public funded gift giving during/for the Chinese New Year. This stands to greatly impact companies like Remy, Pernod, DEO, and LVMH. For tobacco companies with international exposure we continue to hear how excise tax hikes will erode future earnings. PM cited weakness due to such hikes in the Philippines and Russia in particular.  CCE has also long been a company to cite the impact of French excise tax hikes (and as a crutch to broader demand weakness).
  • Organic Is the Growth: for yet another quarter we remain interested in investing behind higher growth organic companies.  BNNY is included in our high conviction long list below, and we like the prospects of HAIN and Boulder Brands (BDBD), at a price, as a play to the evolving organic (and gluten-free) movement.
  • M&A Speculation Continues: interestingly there’s been no new news around PEP and MDLZ since the noisier activism witnessed last quarter.
  • Revenue Misses: of the Consumer Staples companies in the S&P500 that have reported results, on revenue just 15 Beat and 23 Missed, or 39% beat, which is tied with Materials for the worst performance of the 9 S&P500 sectors). On EPS, 26 Beat and 12 Missed, or 68% beat, putting Consumer Staples at the mid to lower range of the pack.  In fact, Consumer Staples underperformed the broad S&P500 (revenues beat 54%, and EPS beat 75%).

As a point of reference, directly below we’ve included the price performance of our highest conviction stocks following last quarter’s reported results (Q2). The price performance is somewhat arbitrary, as the entry price reflects the date of this report’s release last quarter (8/14/13) and not our specific entry point targets (the closing reports are based on yesterday’s close), however the numbers provide a reference point for our calls.


Q2 Top Longs: LO (43.52 – 51.54, +18.4%), HSY (96.09 – 97.72, +1.7%), TSN (31.80 – 31.65, -0.5%), SAM (211.70 – 246.20, +16.3%)


Q2 Top Shorts: PM (88.18 – 85.50, +3.0%), DPS (45.86 – 48.47, -5.7%), CCE (38.37 – 42.16, -9.9%), K (65.42 – 60.88, +6.9%), KMB (96.78 – 108.22, -11.8%)



Highest Conviction Stocks Following Reported Q3 2013 Results

Long Ideas

  • LO – we expect Lorillard to continue to see outperformance on strong demand for its full-flavored offerings and dominate share of menthol, both contributing to volume outperformance versus the industry (in the quarter LO’s +3.5% versus industry’s avg. -4%). Gross profit margins improved 80bps to 37.1% in the quarter as domestic retail share of the menthol market reached 40.4%, an increase of 0.8 share points versus the prior-year quarter, and the company rolled out Newport Gold, a non-menthol compliment to Red in the quarter. Electronic cigarettes continue to garner huge interest from the investor community. Despite only representing ~ 1% of the portfolio, LO was the first Big Tobacco company to market with Blu in April 2012, and in the quarter took leading market share from 40% to 49%! Further, the company became an international e-cig dealer through its purchase of UK-based SKYCIG in October 2013.
  • SAM – it’s hard to argue with Boston Beer’s results. We remain committed to this stock, but are closely managing its up-on-a-rope price level (up +17% since we published a similar note highlighting our bullish conviction on SAM last quarter). The company ever so slightly lowered its FY 2013 guidance range by 5 cents in the quarter to $5.05 – $5.35, and we see good runway in 2014 on balanced comps, continued support from Twisted Tea and Angry Orchard, and broad interest in the craft segment, in which SAM continues to be a favored, recognized brand. We expect the company’s increased cap-ex spend to build brewery capacity (including a new bottling and can line, announced last quarter) to boost 2014 shipping volumes and reverse recent bottle necks resulting from overcapacity and the higher costs associated with using third party breweries.  
  • HSY – Hershey’s reported another strong quarter, furthering our bullish outlook on the stock since last quarter, through solid core brand performance with momentum building going into the holiday season.  Net sales were driven squarely by volume (Volume +6.1%; Net Price +0.5%; FX -0.5%) in the quarter. Similar to SAM, we’re bullish on its intermediate to longer term strategy to build to grow: it announced plans to invest $250MM in cap-ex to build a new plant in Malaysia (to supply markets in Asia and assist existing capacity in China). Heading into year-end, the company reiterated its expectations for FY 2013 net sales of 7%, with no change to the input cost outlook, revised up its FY Gross Margins expectations to 240 to 250 bps vs a previous estimate of 220 to 230, and said it sees a more favorable tax rate and earlier Chinese New Year offsetting an increased marketing spend in Q4.  We’re bullish on HSY’s performance across retail channels and its determination to grow its international business, in particular China to its second largest business, and believe the additional cap-ex spend will allow it to enhance its manufacturing scale in China (currently it has a manufacturing JV facility) and across Asia.
  • BNNY – the company reported strong top and bottom line fiscal Q2 2014 results, yet saw some gross margin pressure from frozen pizza results. Despite some unevenness in the quarter we remain bullish on the company as its 2H outlook stands to benefit from product roll-out, COGS and SG&A efficiencies, including from its acquisition of Safeway’s manufacturing plant in Missouri, where the company has been producing over 50% of its snacks business since inception in 2002 (again, spending to grow similar to SAM and HSY). Over recent weeks the stock saw underperformance around a CFO shake-up and a secondary offering of 2.5MM common stock shares. We however remain long term bulls on Annie’s based on the company’s advantaged organic portfolio, strong retail positioning for growth, and easier top line and gross margin comparisons going into the back half of its fiscal year.  

Short Ideas

  • PM – Philip Morris’s headwinds are a continuation of last quarter’s: FX hits, large volume declines (-5.7%, a deceleration vs last quarter’s -3.9% and underperformance vs the industry) on weakness in core geographies (including the EU down -7% to -8% in 2014), increased excise taxes in key geographies like Russia (hit to volume est. -9% to -11%) and the Philippines (no guidance, could be larger than Russia), and an uptick in illicit trade. The company announced plans to accelerate the launch of an electronic cigarette to mid-2014 versus previous guidance of 2016/7.  While we applaud PM’s desire to keep up with its peers in the e-cig category (which as mentioned has captured huge investor attention) but it comes at an incremental $100MM price tag, which could also drag on results.  For now, for the third straight quarter this year the company revised down its FY EPS guidance, to $5.35-5.40 vs prior guidance of $5.43-5.53.
  • CPB – Are you into catching falling knives? The stock is down over -18% since its summer high of $48. In our minds CPB has failed to turn around its portfolio since it offered up big restructuring plans at CAGNY in FEB 2012, however the stock wouldn’t tell such a negative story over this period.  Management lowered its 2014 FY guidance in the quarter; we expect US Simple Meals and US Beverages to continue to underperform expectations next quarter, and margins to be hit as CPB plans to increase its marketing spend and accelerate the launch of 8 new products. We see more difficult comps ahead and no clearance on the value proposition of its strategy to offer more premium soups given a still strapped U.S. and global  consumer. We think there’s more room to run on the short side.


Our quantitative real-time set-up for Consumer Staples (etf: XLP) is bullish, trading above its intermediate term TREND line. 


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Matthew Hedrick