For the 99% who fail to find the vagaries of federal budget accounting and the interminable tragicomedy that is bipartisan budget negotiations scintillating, the following link provides a summary review of sequestration and the key provisions/budget impacts  >>    SEQUESTRATION 2014: WHAT'S THE IMPACT AGAIN?



Below we provide a quick update on how the emergent accord between Representative Ryan and Senator Murray impacts the numbers.




Late yesterday we got the latest (prospective) chapter in the budget debate and ongoing evolution of the Budget Control Act – the 2011 legislation which defined discretionary spending levels over the balance of the decade.   The crux of the budget deal – ‘sequester relief’ via higher spending - is highlighted in the following table. 


Summarily, the agreement proposes to raise spending levels by a combined $63B over FY2014 and FY2015.  It would also provide for a net deficit reduction of $22.5B over ten years, stemming primarily from higher user fee’s (airlines), increased pension and benefit expenses for federal workers, and a 2Y extension of Medicare payment cuts.  




Dollar Bearish (kinda), Consumption Bullish (maybe):

In isolation, a budget agreement calling for higher  spending is dollar bearish on the margin.  However, to the extent that increased fiscal policy clarity pulls forward the tapering timeline, a multi-year accord could be viewed as a positive for the currency. 


On balance, and if the Fed is, indeed, data dependent, the investment conclusion is somewhat equivocal.  We’ll continue to let the market act as arbiter, using price as our signal.  Investors have been net sellers of dollars for 5 consecutive weeks and, as it stands currently, the dollar remains broken on both TREND and TAIL durations with the next level of TRADE support at $79.67 on the DXY.   


In the intermediate term, higher federal spending offers some potential upside to consumption growth.  As we’ve highlighted (HERE), government sourced income has been a discrete drag on aggregate personal and disposable income growth as sequestration/furloughs and ongoing federal employment loss have driven negative income growth for ~17% of the national workforce. 


If the decline in federal employment bases and government salary and wage growth goes positive (against easy compares) in 2014, consumption growth could see some moderate upside. 




Christian B. Drake



[VIDEO] Keith's Macro Notebook 12/11: Asia, Inflation, Gold

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What's New Today in Retail (12/11)

Takeaway: DTLR scraps IPO plans, Reebok opens FitHub in Paris, RSH refinances



COST - Earnings Call: Wednesday 12/11 11:00 am

LULU - Earnings Call: Thursday 12/12 9:00 am

MW - Earnings Call: Thursday 12/12 9:00 am




China’s Retail Sales Accelerate as Factory Output Slows



  • "China’s retail sales unexpectedly accelerated in November while industrial output rose less than estimated, giving a mixed picture of growth as leaders gather in Beijing to set economic policies for the coming year."
  • "Factory production rose 10 percent from a year earlier, the National Bureau of Statistics said in Beijing yesterday, compared with analysts’ median projection of 10.1 percent in a Bloomberg survey. Retail sales advanced 13.7 percent"




HD - The Home Depot Updates Strategic Priorities; Confirms Fiscal Year 2013 Sales And Diluted Earnings Per Share Guidance; Provides Fiscal Year 2014 Financial Outlook And Updates 2015 Financial Targets



  • "The Company reaffirmed its sales and diluted earnings-per-share guidance for fiscal 2013. The Company expects sales to be up approximately 5.6 percent for the year and diluted earnings-per- share to be up approximately 24 percent to $3.72 for the year. Comparable store sales, on a 52-week like for like basis, are expected to be up approximately 7.0 percent for the year. The Company's fiscal 2013 sales and diluted earnings-per-share guidance is based on a 52-week year compared to fiscal 2012, a 53-week year."


DTLR - DTLR Scraps Plans for IPO 



  • "DTLR Holding, Inc. announced that due to a unspecified 'business development' the company has determined to not proceed with its planned initial public offering."
  • "The company declined to comment beyond its one-sentence statement."


ADS - Reebok Opens First Fithub in Paris 



  • "Like the Reebok flagship opened a year ago in New York on 5th Avenue, Reebok is opening its first concept store (Fithub) and CrossFit Box at 31 Avenue de l'Opera, its first Fithub in Paris. The combined store and gym measures 8,600 square feet."


JWN - Jeffrey Kalinsky Shifting Role at Nordstrom



  • "Jeffrey Kalinsky is taking a step back at Nordstrom Inc., where he has been executive vice president of designer merchandising for the last eight-and-a-half years."
  • "Kalinsky, who wants to flex his creative muscles, is planning to focus part of his time on projects outside Nordstrom. He’ll also continue to operate his two namesake stores, Jeffrey New York and Jeffrey in Atlanta, which Nordstrom bought in 2005, naming Kalinsky director of designer merchandising while he remained president and chief executive officer of Jeffrey Inc."


Moncler - Moncler Said Likely to Price IPO at Top of Range on High Demand



  • "Moncler...plans to price its initial public offering at 10.20 euros a share, the top of an indicated range, according to two people familiar with the transaction."
  • "The sale was fully covered on the first day of the offer, said the people, who asked not to be named because the details aren’t public. The order book closes today and is more than 20 times subscribed, one person said."


RSH - RadioShack Closes New Five-Year Financing Totaling $835 Million



  • "RadioShack Corporation announced today that it has completed a new financing totaling $835 million including a $585 million senior secured ABL credit facility led by GE Capital, Corporate Retail Finance and a $250 million secured term loan led by Salus Capital Partners, LLC.  This comprehensive new financing will be used to refinance existing debt and provide approximately $200 million of incremental liquidity, all of which will further strengthen the Company's balance sheet as it continues to move forward with its operational turnaround."
  • "The new $250 million secured term loan was led by Salus Capital. The terms of this loan include a five-year duration and a rate of LIBOR plus 11%. This term loan was drawn and funded at closing and is secured by a second lien on the assets securing the new ABL credit facility and a first lien on certain other assets of the Company."




Facebook Ranks as Top Platform in Social Media Survey



  • "When it comes to product and service recommendations, Facebook scored highest as the most trusted platform, according to a new survey conducted by Social Media Link, an advocacy activation company.
  • The survey found that 68 percent said they trusted Facebook over blogs (63 percent); retail Web sites (63 percent); Pinterest (56 percent); YouTube (51 percent); Twitter (41 percent), and Google+ (41 percent)."
  • "According to the study, reviews by friends and family have the biggest impact (86 percent), followed by professionals (58 percent); Web site reviews (54 percent); acquaintances (42 percent); bloggers (39 percent), and celebrities (11 percent)."

Speculative Natures

“Time destroys the speculation of men, but it confirms nature.”



Marcus Tullius Cicero was a Roman philosopher, politician, lawyer, orator, political theorist, and constitutionalist (no word on whether he played hockey).  His impact on the Latin language was so deep that the history of prose in both Latin and European languages, up until the 19th century, is said to be either a reaction against or a return to his style.   To use a sports analogy: he was an impact player.


Like many of you, I tend to tune out much of the main stream media, but I did catch myself watching a little bit of CNBC yesterday.  Interestingly, it actually made me realize that the buy side, sell side, and media are arguing with many of the same platitudes on the topic of tapering.  In short, no one has conviction or a strong insight.  Or certainly, unlike Cicero, their views are not having an impact. 


In the land of bonds, of course, Bill Gross from PIMCO is widely considered to be the impact player.  And rightfully so, as PIMCO manages over $2 trillion in assets and is the world’s largest bond investor.  Even if we don’t agree with PIMCO’s research or views, there can be no debate that the firm has the ability to impact asset prices in a meaningful reallocation.


So, what is the latest from the big bond boys on the taper?  Well, this is what Gross wrote in his most recent monthly letter (which is usually a fun read by the way!):


“The taper will lead to the elimination of QE at some point in 2014, but the 25 basis point policy rate will continue until 6.5% unemployment and 2.0% inflation at a minimum have been achieved. If so, front-end Treasury, corporate and mortgage positions should provide low but attractively defensive returns.


We have positioned our bond wars portfolio – heavily front-end maturity loaded along with credit, volatility and curve steepening positions, with the aim of outperforming Vanguard as well as many other active managers.”


In part, especially given PIMCO’s sizeable position, Gross’s job is to influence and ensure the bond market doesn’t shake, rattle, or roll in any direction that isn’t beneficial to PIMCO.   If you are Gross, you certainly want the incremental buyer to be focused on mortgage backed securities.


Currently, $40 billion of the Fed’s monthly purchases are in the MBS market.  In aggregate, this is more than half a trillion in annual purchases of mortgage backed securities.   The impact of multiple rounds of QE has been that the premium of Agency MBS over Treasuries has narrowed by some ~50 basis points from pre-QE to post-QE. 


Given that 34% of PIMCO’s Total Return Fund are in agency MBS, there is some serious interest rate risk in that position.  By our estimation, a 50 basis point move in the spread of Agency MBS has the potential to lead to 5% downside in price.  To the extent that 34% of PIMCO’s “book” has the potential to be marked down 5%, that is a big deal for PIMCO and the associated market. 


Reflexively, if PIMCO were to underperform, they would then be forced to liquidate MBS positions as investors exited their funds.  In turn, this would amplify any move in price.  A mass exit of PIMCO would be an “Aye Carumba” moment in the MBS market to be sure.


Back to the Global Macro Grind


On the longer end of the curve, specifically 10-year yields, tapering is getting somewhat priced in.  In the Chart of the Day, we show this graphically by comparing 10-year yields, to the Fed Funds rate, to the Federal Reserve balance sheet.  As the chart below shows, 10-year yields are now back at a level not seen since early 2011, which pre-dated QE Infinity (i.e. the open ended purchases that began in September 2012).


In the hypothetical world where 10-year rates actually get priced based on economic fundamentals, the current spread of 2.6% between the 10-year yield and the Fed’s discount rate may not be far off reality.  For context, the average spread between the two over the last decade was about 1.7% and since 1954 0.54%.   Certainly, the 100 basis points widening of this spread over the last year is indicative of some level of tapering being priced in. 


This all leads to an interesting question: will tapering be a ‘sell the news’ moment for 10-year yields?  That’s a question I’ll leave to the speculators and those that need to protect their book to answer...


One point that many pundits don’t seem to be talking about is that a decline in tapering will be positive for the U.S. dollar.  This is further supported by a point we have been highlighting consistently, which is that the Federal deficit has been narrowing.   In the fiscal year ending 2013, the federal deficit was below $1 trillion for the first time since 2008.


This improvement continued into this fiscal year as the deficit in October was -$91.6 billion, an improvement of 24% year-over-year.   The Treasury will release November’s budget numbers at 2pm and we would expect similar improvement.  In addition to this budget improvement, the fact that Congress seems to actually be functioning should also bode well for the U.S. dollar.


In fact, last night the House and Senate announced a two year budget deal.  Even if the deal isn’t ideal, thankfully our elected officials are at least getting out of the way and signaling to the world that they can functionally manage the country.  From a deficit perspective, there will be $63 billion in increased spending (sequester relief) over the next two years, but that shouldn’t impact the continued narrowing of federal budgets.  It’s amazing what our elected officials can accomplish when they get out of the way.


Just imagine what would happen if the un-elected officials at the Fed got out of the way, the strong dollar American growth story would be fully in play!


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.75-2.82% 

SPX 1 

Gold 1 

Brent 108.67-110.87 

VIX 12.85-15.28 

USD 79.67-80.49


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Speculative Natures - 10Y Normalcy


Speculative Natures - virtual portfolio

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