Client Talking Points
The Dollar is down for FIVE weeks in a row now. It is officially in a Bearish Formation as the Federal Reserve whispers sweet nothings of having a policy that is clearly not data dependent. Across the pond, both the Euro and Pound are loving this lack of US currency credibility. On the margin this is good news for European purchasing power.
Shhh. Don’t tell the Fed, but that Down Dollar? It's kick-starting that ole 2011-2012 style inverse correlation to Commodity Inflation again. Brent Oil versus US Dollar has an inverse correlation of -0.66 now on a 6 week duration. Both Brent and WTIC are up about 1% this morning after Brent held our Hedgeye TAIL risk support of $109.07/barrel. We covered our Oil short yesterday.
10YR UST YIELD
Not to be confused with data dependence, the Federal Reserve has a policy outcome that will stand, irrespective of the data. If that means a lower-high for bond yields (versus the September pre-no-taper highs), the 10-year could easily drop 20 basis points from here. We're watching 2.80% as an immediate-term momentum line.
|FIXED INCOME||6%||INTL CURRENCIES||24%|
Top Long Ideas
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
TWEET OF THE DAY
GOLD: continues to make a series of higher-lows (vs June) and we remain long of it @KeithMcCullough
QUOTE OF THE DAY
"Don't count the days, make the days count." - Muhammad Ali
STAT OF THE DAY
The average cost of tuition and fees at a public, four-year institution for an in-state student is $8,093. At a private four-year university, tuition and fees are more than $30,000. (MarketWatch)
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“… self assured, guided by his own ferocious determination.”
-Doris Kearns Goodwin
No matter what your views are on how this epic market move ends, you have to find it within yourself to find a way to win. This has nothing to do with what you’d like your former free-markets to be; it has everything to do with risk managing what they have become.
The aforementioned quote is one that defined President Teddy Roosevelt’s character at a very young age. “Teedie (his nickname) held a distinct place among his siblings; the asthma that had weakened his body seemed to have inordinately sharpened his mind and sensibilities… he was always reading or writing with a most unusual power of concentration.” (The Bully Pulpit, pg 37)
So, in the spirit of what America’s “Strenuous Life” used to stand for, sharpen your mind this morning. Challenge yourself to learn. Evolve your investment process. And, above all else, tone down your emotional market response to whatever you may or may not have missed.
Back to the Global Macro Grind…
Are you ferociously determined to beat beta? I am. And I’m not going to apologize for that. Why else would you wake up to play this game every morning unless you wanted to win?
After 382 points of price appreciation, the SP500 clocked yet another all-time closing high yesterday of 1808. That’s a +26.8% gain for 2013 YTD. And once again, it came on a no-taper (in December) market expectation day.
Whether you or I think the Fed should have tapered in September doesn’t actually matter at this stage of the game. Been there, argued about that. What matters is what decisions you make next.
Risk is always changing. Up until September 18th, Mr. Macro Market scored growth as the most relevant stock market risk (to the upside). Sure, some people were bullish – but consensus wasn’t positioned bullish. Here’s what worked from JAN-SEP:
- #RatesRising (Gold and Bonds weren’t working)
- #GrowthAccelerating (as an Equity Style Factor)
Then, post the Fed’s unaccountable decision not to taper (as Q313 US Growth was tracking +3.6%), from mid-SEP to mid-OCT:
- Down Dollar
- Rates Falling
- #GrowthSlowing outperformed growth
Then, in November, growth as an Equity Style Factor started to recover again:
- Rates Rose
- Gold fell
- But the US Dollar remained no bid (in spite of an ECB rate cut!)
Now, look at what we have – the return of our old un-elected friend: @FederalReserve’s Policy To Inflate:
- Down Dollar (for 5 straight weeks)
- CRB Commodities Index inflation (and Gold) arrested their YTD lows
- Oil prices and inflation oriented equities inflating again
Instead of debating this, look at the trivial matter that is Correlation Risk between the US Dollar and everything else (using a 6 week duration – these are inverse correlations; i.e. Down Dollar = Up X):
- SP500 vs USD = -0.63
- Brent Oil vs USD = -0.66
- CRB Commodities Index vs USD = -0.73
- Nasdaq vs USD = -0.79
- Natural Gas = -0.85
For whom? The small percentage of us in America who understands it? Or to those who are the recipient of inflated prices at the pump and accelerating costs to heat their homes during today’s CT snowstorm?
Yes We Can, baby. We can re-flate Bernanke’s Bubble in commodity prices. Why not? Who cares if it slows everything that we haven’t had during this entire monetary policy experiment (sustained real-consumption growth). It’s time to buy some coal!
To be clear, this will end in tears. But, in the meantime, I will trade this market’s all-time highs with ferocious determination. Yes, that means that on pullbacks I will buy-the-damn-bubble #BTDB. Then I’ll sell on green too. Keep moving out there; risk does.
Our immediate-term Risk Ranges are now:
10yr UST Yield 2.80-2.91%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on November 26, 2013 for Hedgeye subscribers.
“Should we care about how new ideas begin?”
That’s a very basic question Jon Gertner asks at the beginning of a book I’ve been grinding through as of late – The Idea Factory: Bell Labs and the Great Age of American Innovation.
The story of innovation at Bell Labs is better than the book. It’s a uniquely American story that most entrepreneurs, innovators, and patriots can associate with. It’s all about the struggle, the wins, and the losses. The boys at Bell Labs (yes, they were all boys) shared a culture of learning and evolution. They weren’t afraid to make mistakes.
There was a little bit of everyone in their ranks. “Kelly, Fisk, Shockley, Shannon, Pierce, and Baker. Some of these names are notorious – Shockley won the Nobel Prize in Physics in 1956… in Shannon’s case, it was mathematics and artificial intelligence, while remaining largely unknown by the public…” (Gertner). A multi-factor approach perpetuated their growth.
Back to the Global Macro Grind…
We’re trying to build that culture of learning both internally (working as a team) and externally (collaborating with clients). We don’t have any Nobel laureates on staff, but we do allow the lowest level IQs (hockey players like me) to contribute.
Do we care how new ideas begin? Nope. Not at all. Mr. Macro Market decides that for us. Our research process is grounded in the uncertainty of it all. That’s what makes it so exciting. We are humble observers of time and space.
This, as I pointed out earlier, isn’t a new style of thinking. Per Gertner, to a degree Thomas Edison made it cool at Bell Labs too. On ideas, “…how they worked was to Edison less important… he read compulsively… he scorned talk about scientific theory…” (pg 12). Imagine Edison had to deal with Keynesian “economists”!
A few weeks ago (November 14th) I wrote an Early Look titled “A New Idea”, so I’m going to go back to milking that cow this morning (plural title) with my “everyone’s a winner” position at Mr. Macro Market’s centrally-infected casino.
To review, I have my market bets spread across the macro table:
1. CASH = 44% (need lots of cash in case this sucker implodes)
2. FX = 24% (lots of alpha to be generated on the other side of the USA Burning The Buck)
3. INTERNATIONAL EQUITIES = 8% (some of these markets love Down Dollar)
4. US EQUITIES = 8% (the variance of US Sector Returns is testing all-time lows)
5. COMMODITIES = 8% (we’re still rolling the bones on Gold)
6. FIXED INCOME = 8% (no-taper in DEC is a big Bond Bull Lobby @PIMCO wants)
And, again… to be clear, I realize that in some cases I am buying-the-damn-bubble #BTDB (both former ones like Gold and Bonds, and news ones like US stocks) here. But what do I care about the “why” on these new ideas anyway?
The #OldWall idea of trying to call tops has rendered itself useless. They are processes, not points.
Looking at the all-time-bubble-highs in US stocks, what is signaling caution?
1. VOLUME – vs its TREND, US Equity volumes have tracked down -11% and -14%, respectively, at the last 2 closing highs
2. VOLATILITY - front month VIX has been making higher-lows as SPX tracks higher-highs on falling volume
3. BREADTH – at the closing high (Russell2000 = 1124) yesterday’s breadth was negative (more decliners than gainers)
Does that mean we can all jump up and down @Hedgeye headquarters today and call “the top”? Nope. It means what it means. With “it” usually meaning something new.
On the other side of the caution signs, there are plenty green lights:
1. EQUITY FLOWS – US Equity fund INFLOWS are trending at fresh YTD highs
2. BOND FLOWS – US Bond Fund OUTFLOWS are trending at fresh YTD highs
3. TRADE and TREND SIGNALS – for SPX, RUT and NASDAQ remain bullish
So what matters more, internal market signals or external flows? I don’t know, yet. But I am certain that Mr. Macro Market will decide, and not me. That’s not a new idea either.
Neither is buying on red and selling on green. So in between now and whenever whatever this is ends, within our immediate-term risk ranges for stocks, bonds, commodities, and currencies, we’ll just keep doing more of that. Keep moving out there.
Our immediate-term Global Macro Risk Ranges are now as follows:
UST 10yr Yield 2.69-2.81%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: Our bearish thesis on MCD remains in play.
Editor's note: Hedgeye analyst Howard Penney has basically been the sole bear on McDonald's this whole year. And he's been dead right. Some interesting stats: MCD is down -5.5% since Penney made his short call earlier this year on April 25th. For comparison's sake, the XLY (Consumer Discretionary) has risen almost +20% since then. The S&P 500 is up over +14%. It's hard to beat being right on the short side in a red-hot bull market.
Here's a snippet from a report he sent out earlier this afternoon.
“Looking ahead to 2014, the U.S. is intent on rebuilding its underlying business momentum by strengthening key elements of customer service and leveraging the breadth of menu choices across all dayparts and value tiers.”
- McDonald’s November Press Release
We found the above quote to be quite interesting. In October, McDonald’s spoke of strengthening its underlying business momentum in 2014. In November, however, the talk has shifted to rebuilding its underlying business momentum in 2014. As we have been calling out for the greater part of 2013, MCD has issues in its underlying core business that management must address. The fact that management finally acknowledged it needs to rebuild its U.S. business momentum is a positive; but it is not a solution...
...Overall, November marked another disappointing month for MCD, as the company missed muted global same-store sales estimates. The U.S. was once again a major source of disappointment, as the company attributed the weak comparable sales to the competitive environment and flat industry traffic trends. To be clear, this suggests that MCD is losing market share in the U.S. and, we contend, they have been for a while.
Despite the temporary uptick in two-year trends, our bearish thesis remains in play. With the street looking for 7% EPS growth in 2014, we continue to believe there is disconnect between investor’s expectations and the company’s fundamentals. Until we see a legitimate change in company operations or strategy, we fail to see how MCD will be able to hit the street's current 2014 EPS target.
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