December Taper? Doubtful.

Client Talking Points


10-Year Treasury yield down a beep this morning to 2.85% (and making a lower-high versus the year-to-date high in September when Bernanke went no-taper). So, if I have to handicap what the bond market thinks versus consensus “economists” (Bloomberg survey just went from 17% on December-taper to 34%), its still no-taper (there’s a -133,201 net short position in CFTC futures/options on the 10-year).


The Greenback is down for four straight weeks as Bernanke/Yellen devalue the Dollar. The Euro continues to breakout versus the US Dollar. So on the margin, the currency market thinks no December-taper too, despite there being a bigger net long position in USD than EUR currently.


At +26,774 contracts, this is the lowest net long position (CFTC data) since June of 2007. It sounds about right now that 3.6% US GDP and #RatesRising are old news for 2013. If and when US growth slows in the next 3-6 months Gold could be a good contrarian long if the June 2013 lows of $1200 hold.

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


Yield Spread (10yr minus 2yr) is a healthy +255bps wide - bullish for the Financials $XLF @HedgeyeFIG


"The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself." - George B Shaw


China's annual consumer inflation unexpectedly slowed to 3% in November from an eight-month high of 3.2%, according to the National Bureau of Statistics, easing market fears of any imminent policy tightening as authorities meet this week to outline their policy and reform priorities for 2014. (CNN)

Prosperity's Threat

“History tells us that the threat to prosperity is not debt but socialism.”

-George Gilder


After a +3.6% US GDP print and back to back bullish monthly surprises on the US employment front, you’d think that America’s currency would get a bid. Nope. Why?


Irrespective of December-taper “odds” doubling last week (34% of “economists” in the Bloomberg survey think DEC-taper = #on versus 17% prior), Mr. Macro Market is still telling you that Ben Bernanke will devalue the Dollar for as long as he can.


Since the Fed is both un-elected and unaccountable, would you call this socialism? Whatever you want to call it, not letting free-market prices clear is a threat to the long-term economic prosperity of this country. So make sure to sell some stuff high on that.


Back to the Global Macro Grind


After 5 consecutive down days, the 2013 US stock market bears got ripped for a +1.12% move on Friday. You either bought-the-damn-bubble #BTDB on red during the -1.2% five-day correction, or you did not. We call this managing the risk of the range.


If @FederalReserve continues to debauch the Dollar, the makeup of what works on US stock market up days will start to change. This is what happened in 2011 in particular. It’s also what happened last week:

  1. Utilities (XLU) = +1.1% on the week
  2. Consumer Discretionary (XLY) = -0.7% on the week

In other words, Policies to Inflate slow the expectations of future real-inflation-adjusted-economic-growth. This is not new to anyone who lives in the real world – it just annoys the Keynesians.


Here’s another way to look at inflation expectations rising in the face of US purchasing power falling:

  1. US Dollar Index down another -0.5% last week (down 4 straight weeks) to +0.7% YTD
  2. CRB Commodities Index (19 commodities) +1.4% last week to -5.5% YTD

In other words, if the market expects the Fed to devalue the value of money, it will start to bid up the prices of things you buy with those moneys. Venezuela burned its currency at the stake. Its stock market index is now 2,597,592.25 (+451% YTD). #Cool, eh?


Obviously the USA going back to where we were in 2011-2012 (weak currency and nothing sustainable to speak of from a real-economic growth perspective), would be bad. I don’t doubt, for one second, that the Fed can perpetuate that.


To review why we were bullish on US #GrowthAccelerating in 2013:

  1. PURCHASING POWER: US Dollar was baking in A) fiscal sequestration and B) tapering well into Q313
  2. INFLATION: #StrongCurrency + #RatesRising would Deflate The Inflation (CPI surprised consensus on the downside)
  3. GROWTH: from 0.14% in Q412 to +3.6% in Q313, and business expectations cycle took hold

And yes, as business and consumer confidence rose in Q3, fixed investment and inventories rose. It’s called a cycle. So did the Savings Rate (5.0% in Q3 vs 4.7% in the prior report). When people have more money, they have more to save too!


The other thing that happened in Q313 that got zero attention from the disingenuous (whining) 2013 perma bears last week was that the DEFLATOR in the US GDP report actually understated GDP growth by almost 0.3%.


After almost hitting a 40-yr low in Q2 (yes that was stimulative for US consumption growth, like it was in Q109), the US GDP Deflator was 1.96%. That was more than a double, sequentially, and +24 basis points higher than MIT’s Billion Prices Project inflation rate of 1.72%.


*higher deflator (i.e. more inflation) subtracts from reported GDP growth


Put another way, in our GIP (GROWTH, INFLATION, POLICY) model, provided that the Fed doesn’t taper in December, you can pretty much bake the opposite call we’ve had in the last year into the cake:

  1. US DOLLAR could start to see more downward pressure into Q114
  2. INFLATION (both CPI and PPI headline) should bottom, sequentially, in Q413 (rise in Q1)
  3. GROWTH should slow, sequentially, in Q413-Q114, in kind

So what do you do with that? That’s easy. Buy “slower-growth” assets and some inflation protection.


We also like the prospects for European #GrowthAccelerating (see our Q413 #EuroBulls Macro Theme) if EUR/USD continues to strengthen like it did again last week (+0.8% to +3.9% YTD).


You might call some Europeans socialists; but they might just call Americans that now too.


Our immediate-term Risk Ranges are now (we have 12 Big Macro Ranges in our Daily Trading Range product):


UST 10yr yield 2.79-2.91%


VIX 12.23-14.91

USD 80.09-80.63

EUR/USD 1.35-1.37

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Prosperity's Threat - Chart of the Day


Prosperity's Threat - Virtual Portfolio

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.34%






A second Resorts World Sentosa (RWS) executive was dealt with on Friday for her part in misleading the Casino Regulatory Authority (CRA) over the issuance of freebies to gamblers who renewed their annual entry levies.  Sim Bee Ling, 31, who is also known as Chernie, was fined $20,000. She had pleaded guilty last week to instructing team leader Thien Lai Foo in mid 2011 to use correction fluid and erase all mention of the giving of Universal Studios Singapore (USS) tickets for annual levy renewals in a briefing book, which is used to communicate instructions to the next shift of employees.



Casinos and slot machine parlours that failed the most recent air quality tests have until tomorrow to submit plans to reduce the size of their smoking areas, the Health Bureau says.  The 16 gaming establishments that failed the second round of tests must trim their smoking areas by 10%.  The bureau is still awaiting proposals from 14 gaming establishments.

Understanding Markets

This note was originally published at 8am on November 25, 2013 for Hedgeye subscribers.

“Anyone who isn’t confused doesn’t really understand the situation.”

-Edward R. Murrow


That was the closing quote from David Einhorn’s most recent quarterly letter. I can’t think of one that better summarizes where we are right now in understanding markets. So I’ll leave it at that.


Back to the Global Macro Grind


While he’s been quite adept at not violating Rule #1 of investing (don’t lose money), that doesn’t mean Einhorn shies away from writing about where he could make more money. One of those areas is high short interest stocks.


From a Hedgeye Style Factoring perspective, last week was the 1st week of 2013 where SHORT INTEREST (as a style factor) diverged versus its TREND. We look at these style factors by quartile in the SP500:

  1. HIGH SHORT INTEREST (as a style factor) was -0.5% last week
  2. LOW SHORTS INTEREST (as a style factor) was +0.8% last week

In other words, if you’re short company that hedge fund consensus (high short interest) doesn’t like, the stock actually had a good chance of going down last week. Look at Tesla (TSLA). That’s new.


What wasn’t new vs. intermediate-term macro TRENDs last week?

  1. US stocks closing at another all-time high (SP500 = 1804, +26.5% YTD)
  2. #RatesRising on the 10 yr US Treasury Yield (+4 bps w/w to 2.74% = +99 bps YTD)
  3. Rate Sensitive “asset classes” (like Gold and REITS) going down on that

In fact, “rate sensitive” was really sensitive last week:

  1. MSCI REITS (real estate) Index lost another -2.2% going to FLAT 0.0% return for 2013 YTD
  2. Gold was down another -3.4% on the wk to -26.3% for 2013 YTD

And, to be clear, all those pundits who told you that #RatesRising (tapering) was going to spell the #EOW (end of the world) were dead wrong this year. Wrong is as wrong does.


Would you be wrong to buy anything “rate sensitive” on sale today? Buying any of Bernanke’s Yield Chasing Bubbles is not for the faint of heart. While he won’t acknowledge the mother of all global commodity inflations (2011-2012), history’s score will.


For the YTD here are your Top 5 Deflating of Bernanke’s Inflations moves:

  1. Silver -34.6%
  2. Coffee -33.0%
  3. Corn -29.6%
  4. Gold -26.3%
  5. Coal -20.3%

I know. I know. At the all-time high in world food prices (2012), there was NO INFLATION. More Jelly Donuts, please.


At the all-time high in commodity inflation expectations (2011), check out our Chart of The Day: the net length of the CFTC (Commodities Futures Trading Commission) non-commercial net long positioning in Gold spanning Bernanke’s tenure as Fed overlord:

  1. John Paulson launches his Gold fund 2010
  2. EXPECTATIONS PEAK = August 2nd, 2011 = +289,000 net long Gold contracts
  3. SPOT GOLD PRICE PEAK ($1900.20) = September 5th, 2011

Last week’s net long position in Gold fell below < 75,000 net long contracts for only the 2nd time since 2008. Down -15% week-over-week to +71,840 net long contracts, that’s down -75% from the expectations peak (not to be confused with the price inflation peak).


Expectations, as Shakespeare wrote, are the root of all heartache. And my guess is that those shorting Gold -1% this morning will have some heartache of their own when we get back from Thanksgiving. So get all wild and crazy today, and buy yourself some. It’s “cheap-(er)”!


What is not confusing about Gold is that it trades on expectations. When the market expected interest rates to rise into their YTD peak (January-July 2013), it went down; when the market expected rates to fall (July-September 2013 into no-taper), Gold went up.


Oh, and if you are confused as to whether or not our central planning overlords will allow #RatesRising (and Gold falling) from today’s time/price, join the club. Because, eventually, the Fed may very well lose control of that expectation too.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.69-2.83%

SPX 1788-1810

VIX 11.85-13.62

USD 80.54-81.29

Brent 106.25-111.24

Gold 1226-1266


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Understanding Markets - Chart of the Day


Understanding Markets - Virtual Portfolio

JCP: Round 2 -- JCP/Dept Store Consumer Survey

Takeaway: Reminder - 2nd installment of the Hedgeye Retail Consumer Survey on JCP & the Department stores. Monday 12/9 at 1pm ET ***CALL INFO INCLUDED

As a reminder, the first iteration of this 1,000 consumer survey was a critical component of our call to be long JCP over the past three months, and to be short KSS into 3Q earnings (which it missed). We already know JCP's 10% November comp, but the purpose of this survey is to go much deeper in order to flush out key fundamental issues around the JCP story and store experience.  


JCP: Round 2 -- JCP/Dept Store Consumer Survey - jcp call



  1. First off, better than half of the questions will be identical to what we asked just three months ago, so not only will we see what consumers are thinking, but we'll be comparing to what they said last time to gauge incremental change.
  2. We'll provide an update on market share. We already think we know where it went (per our last survey), but now we'll verify (or challenge) our prior findings by re-polling Consumers.
  3. More importantly we'll now have a sense as to where JCP is stealing back market share from KSS, M, TJX, TGT, SHLD, others?
  4. We'll look at Private brands, which we think are critical to 600bp Gross Margin rebound, and the extent to which JCP is having success reintroducing these brands to consumers. Do people want them as much now as they did pre RonJon?
  5. In this survey, we placed a greater emphasis on JCP's online business. The company's results already show that it's rebounding, but we dive into what and who the specific drivers are.
  6. The company has introduced several new brands over the past three months. Do people care? Are they attracting incremental shoppers


  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 125175#
  • Materials: CLICK HERE (slides will download one hour prior to the start of the call)



For question please email 

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