Your House

This note was originally published at 8am on February 21, 2014 for Hedgeye subscribers.

“We live in a house, and therefore we consume the house.”

-John Allison


Yep, I am Canadian.


I lived in a Canadian house until I was 24 years old and have the flag tattooed on my back. Consequently, I will be consumed by my confirmation bias today as Canada’s men try to beat America’s like our women did yesterday.


Your House - boom


Don’t worry, I’m not competitive or anything. When my all-American wife (Laura in Lacrosse) wasn’t looking one day, I hung a massive Canadian flag over my son Jack’s bed. As he was sleeping, I subliminally got him in the mind!


Admittedly, I have started to teach all 3 of my children that the USA is the best in the world, at creating asset bubbles. Just like John Allison does in the aforementioned quote about real-world economics, I have to call it like it is.


Back to the Global Macro Grind


“In economic terms, spending on housing is consumption, not investment… houses are not used to produce other goods… thus the misinvestment in housing in housing shifted resources from production to consumption.” –John Allison (pg 8)


No, “misinvestment” isn’t a word that spell-checks inasmuch as “misinformation” did for a Canadian hockey player (me) in the mid-1990s when it was introduced to me by one of the great leaders in my life (former US Olympic Hockey Coach, Tim Taylor).


“Mucker, you don’t really have any moves… so you need to start waggling the blade of your stick when you are carrying the puck up ice to give the defense some misinformation.” –Tim Taylor


Try it – it works!


Longer-term, an un-elected central planning bureau (The Fed) forcing investors to chase short-term price inflations (and “yields”) to all-time bubble highs won’t work. Anyone who didn’t sleep through the deflation of asset prices in 2008 will get that.


I had a lot of feedback on John Allison’s “fundamental themes” yesterday (mainly because I left 3 of his top 6 out). They are:


1.       “Individual financial Institutions (#OldWall) made very serious mistakes that contributed to the crisis
2.       “The deeper causes of our financial challenges are philosophical, not economic”
3.       “If we don’t change direction soon, the United States will be in very serious financial trouble in 20-25 years”


In other words, the government (and The Federal Reserve) created policies based on academic ideologies (weak currency “boosts exports”, cheap money “boosts housing”, etc) that are A) very short term in nature and B) misaligned with making long-term investments in productive, job generating, assets.


Newsflash: Gold is the least productive major “asset class” in the world – so it loves #InflationAccelerating-slow-growth government policies to fix prices (rates and wages) and devalue the purchasing power of The People in exchange for debt.


The Canada vs. USA score won’t lie today. Neither will the misinvestment, misinformation, or misalignment of the US stock market’s YTD score vs. economic reality (after torching their currencies, Venezuela was +460% last yr and Argentina is +10% YTD).


If you peel back the -0.5% and +9.5% YTD returns of the SP500 and Gold, respectively, and look at the S&P’s Sector Returns:

  1. Slow-growth-yield chasing Utilities (XLU) lead the charge at +6.7% YTD
  2. Consumer Sectors (XLY and XLP) lead losers at -2.6% and -3.0% YTD, respectively
  3. Interest Rate Sensitive Financials (XLF) are underperforming the SP500 at -1.9% YTD

#InflationAccelerating A) slows consumption growth (hurts consumer stocks) and B) encourages investors to chase “yield.” That’s why the Financials (XLF) suck relative to Utilities (XLU) this year inasmuch as they did at the start of 2011.


Put another way, as the Financials, Rates, and the US Dollar go, so will real-economic growth in America. The only modern periods of sustainable US economic growth (i.e. greater than 4% GDP) came in the 1983-1989 (Reagan) and 1993-1999 (Clinton) years. You saw a sneak preview of interest rates and the US Dollar breaking out to the upside in Q3 of 2013 too (US GDP ramped to +4.12%).


That wasn’t my house versus your house. That wasn’t Canada vs. the USA either. That’s how real-world economics works. The only misinformation about it in the US, Japan, Venezuela, etc. today is in how governments and their central-planning-access starved media group-thinkers sell it to you. From a free market capitalist perspective, it’s so very un-American.


Our immediate-term Macro Risk Ranges are now:


SPX 1811-1848

Nikkei 14124-14966

VIX 13.31-15.98

USD 79.91-80.55

Pound 1.65-1.67

Gold 1296-1339


Best of luck to both Team Canada and Team USA today,



Keith R. McCullough
Chief Executive Officer


Your House - Chart of the Day


Your House - Virtual Portfolio

American-Made Shoes for America’s Team

Takeaway: Net/net, we'll take it, even if the U.S. Government is this country’s lowest margin customer.

Should America Build a Strategic Shoe Reserve?

American-Made Shoes for America’s Team - shoe

  • "Under a provision of 1941 legislation known as the Berry Amendment, the Defense Department must buy boots, uniforms and certain other items that are 100% U.S.-made. It can make exceptions if U.S. manufacturers don't have the capacity to make what it needs, and has done so for athletic shoes needed for boot camp."
  • "But now, under pressure from the domestic shoe industry and lawmakers, particularly those from Massachusetts, Maine and Michigan that have some of the country's few remaining shoe plants, the military is going to review its exemption for U.S.-made sneakers."
  • "New Balance Athletic Shoe Inc. and Wolverine Worldwide Inc. both say they could provide 100% U.S.-made athletic footwear for the military. Others expressing interest include Capps Shoe Co., a maker of military shoes, and two producers of military boots: Wellco Enterprises Inc. and the Danner unit of LaCrosse Footwear Inc." 

Takeaway from Hedgeye’s Brian McGough:

While this is good on the margin for Wolverine Worldwide (WWW), the reality is that the lowest margin customer in the country is…


The US Government -- unless you're supplying rockets and other things that explode (and even then, margins are questionable).


But hey, the orders tend to be steady, and they always pay on time.


Net/net, we'll take it.


American-Made Shoes for America’s Team - armyboots

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Rose Colored Bubbles

This note was originally published March 06, 2014 at 08:08 in Morning Newsletter

What’s in a name? That which we call a rose by any other name would smell as sweet.” -William Shakespeare

The big picture

What’s in a bubble?


I’ve been channeling my inner 1999 for the last 3-days in California. I’ve done Los Angeles, San Diego, and San Francisco. And while it would be cute to tell you that I can actually smell a bubble, these types of things don’t have a particular scent.


Rose Colored Bubbles - bub


At the all-time highs, they just look sweet.

Macro grind

All-time highs? Yep. It’s not just Yelp (YELP) and Facebook (FB). It’s Barney Frank’s American Housing dream. The all-time highs in the largest component of American cost of living are here. It’s called rent.


Oh, you don’t rent? Ok, you’re like me then. You’re big time – you own. But don’t confuse the 20% of us who are long asset price inflation with the rest of them (80% of Americans) who get pulverized by Policies to Inflate. The cost to live in this country has never been bubblier.


What’s in the cost of living?

  1. Shelter
  2. Food
  3. Transportation

Unless you’re like the “folks” in Washington who take car service to work, you have to put gas in the transportation thing too. And if you can’t afford a car, you can always save some money and take the bus, or walk…


What’s in the all-time high in American “inequality”?

  1. The Housing Bubble
  2. The Commodity Bubble
  3. The Bond Bubble

One by one, central planners at the Fed blow these bubbles up so big that, like Jim Carey in The Truman Show, we start to live inside them. There’s an effervescence to that, I guess.


Or at least that’s what Oaktree’s Howard Marks said in our back to back presentations at the CFA Society’s Annual Forecast Dinner in San Diego on Monday night.  He called the cov-light-pik-toggle-bond thing being “back” – an “effervescent bubble.”


As we went back and forth in the Q&A part of the event, Marks made an astute observation about real-world life. The average American has $20,000 in post tax income, but spends approximately $22,000 a year.


So, if you ramp up the Top 3 things Americans have to pay for (if they don’t pay for their kids to go to school), the Bush/Obama/Bernanke/Yellen Policy to Inflate should drive cost of living up to say $25,000-30,000/year. That’s why the US Savings (as a % of disposable income) is retracing its 2008 crisis lows. Like their government, Americans once again have to borrow to spend.


In other news, inflation slowed US consumption growth again in February:

  1. USA’s ISM Services report for FEB (reported yesterday) slowed to its lowest level since FEB of 2010
  2. The Employment component of the ISM Services Series dropped < 50 (largest m/m drop since NOV 2008)
  3. US Services PMI (Markit data series) slowed from 56.7 in JAN to 53.3 in FEB

No worries though, it’s all “weather.”


If you want to join the Federal Reserve and believe that (and tell the 80% that inflation doesn’t slow growth), you can start turning on the Weather Channel and buying the all-time highs in social media every day they forecast yesterday’s sunny news.


I’ll be selling stocks (and buying Commodities, Bonds, and Foreign Currencies) into that. Because, like in Q1 of 2011, Down Dollar and Down Rates were signaling a US consumption growth slowdown inasmuch as they did in Q1 of 2008.


As for retracing my California travels of 1999, Q1 of 2000 wasn’t exactly the time to be wearing rose colored glasses either.

Asset Allocation

  • CASH: 31%

Our levels

Our immediate-term Macro Risk Ranges are now:


UST 10yr Yield 2.59-2.75%

SPX 1848-1879

VIX 13.01-15.64

USD 79.86-80.43

Brent 107.31-110.02

Gold 1319-1351


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Rose Colored Bubbles - San Fran HPI

LO: Adding Lorillard to Investing Ideas

Takeaway: We are adding cigarette-maker Lorillard (LO) to Investing Ideas.

Hedgeye is adding Lorillard to Investing Ideas today. 


We will send out a full report from analyst Matt Hedrick detailing our bullish case on the 254-year old cigarette-maker before the weekend.


LO: Adding Lorillard to Investing Ideas - lor

ECB Presser: Lots of Words, No Action, Markets Calm

As expected, this morning the ECB announced no change to its main interest rates.


ECB President Mario Draghi reiterated much of the same policy stance and outlook since his December meeting of last year. The EUR/USD rallied throughout the conference.


Draghi again stressed that the Eurozone may experience a “prolonged period of low inflation”, that the Bank would maintain accommodative monetary policy for “as long as is necessary”, and to expect that key rates would remain “at present or lower levels for an extended period of time.”


What was not spoken?   Draghi did not include measures to suspend sterilization of the SMP, leaving it as an instrument for future consideration. He also spoke of no concrete plans to free up credit to the “real” economy (SMEs in particular).  Draghi gave the following reasons on why the ECB took no action today:

  • Baseline forecast confirmed, with modest economic recovery
  • News out since last meeting, by in large on the positive side
  • PMI data is strongest in 2.5 years
  • PMI services a huge component of job in the region, very positive
  • Metric gaps between Germany and Spain &Italy narrowing
  • Unemployment high, but stabilized


Updated Staff Projections for March versus December moved ever so slightly on the 2014 outlook, boosting GDP 10bps higher, and inflation 10bps lower:


GDP Staff Projections:  1.2% in 2014 (+10bps vs DEC); 1.5% in 2015; 1.8% in 2016

CPI Staff Projections:  1.0% in 2014 (-10bps vs DEC); 1.3% in 2015, 1.5% in 2016



Other Key Takeaways from Draghi:

  • Eurozone government deficit is expected to have declined to 3.2% of GDP in 2013 and is projected to be reduced to 2.7% of GDP in 2014
  • Eurozone government debt is projected to peak at 93.5% of GDP in 2014
  • Emerging Market impact on Eurozone has so far been muted.  In fact there have been flows into Europe that have helped to narrow the spreads between countries
  • On Ukraine: Draghi said he does not suggest strong contagion. But geopolitical risks could become substantial and generate significant consequences. The Bank has not assessed scenarios.
  • On the Eurozone slipping into Japan-like Deflation: Draghi said ECB has taken early and decisive action on monetary policy to prevent anything like Japan’s situation. He remains confident in the 2% inflation anchor.
  • To read a copy of Draghi’s prepared remarks click here.


Investment Positioning:

  • We remain marginal European equity bulls of US equities. Our preferred investment in the region is long German and UK equities (EWG and EWU) and long the Pound/USD (FXB) – note that today the BOE also left the main interest rate unchanged (at 0.50%) and maintained the asset purchase target (as expected), which is supportive of our long call. The GBP/USD is up +2.4% in the last month.
  • Broadly, we believe Draghi’s continued posture of “ready and willing to act” (to ensure the survival of the Eurozone at any cost and keep financial conditions accommodative) will continue to support the common currency and strengthen investor confidence in the equity market.
  • EUR/USD: we expect Yellen to likely pull back on the tapering program to a more dovish position that should weigh on the USD to the downside. See our levels below. 

ECB Presser: Lots of Words, No Action, Markets Calm - zz. EURo


Matthew Hedrick


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