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This Story Doesn't End Well

“Appreciate stories that do not come out well, for they are very much like a good deal of life.”

-James A. Garfield


According to Candice Millard in Destiny of The Republic (pg 19) , that’s what the 20th President of the United States, James A. Garfield, told his kids one night after reading them Shakespeare’s Othello.


Admittedly, I read my kids too many fairy tales. Maybe that’s my escape from the latest chapter of reality that is the US Federal Reserve un-officially Burning The Buck via its Policy To Inflate.


This morning you’ll see the initial outcrop of Dollar Devaluation – consumer price #InflationAccelerating again in the most recent made-up government CPI report. Tomorrow, you’ll see Janet Yellen officially abandon the Fed’s dual mandate and roll with “qualitative rate guidance” (i.e. price fixing interest rates, like Japan did).


This Story Doesn't End Well - usd1


Back to the Global Macro Grind


No, this story doesn’t end well for the US economy and at least 80% of its people. Yes, that is a forecast. And it’s aligned with at least the last years of economic #history.


But don’t worry, the Fed’s main leading indicator (the US stock market) can still go up on this. Venezuela’s was up +460% (in its burning currency) last year, and has since fallen to -5.6% in 2014 YTD. Germany’s stock market went parabolic in the 1920s too.


Dollar Down yesterday perpetuated another no-volume (-20% vs. @Hedgeye TREND) rip in US stocks. While @FederalReserve’s esteemed Ph.D. economists will lie to you and suggest that price fixing the long-end of the curve isn’t “causal” to currency devaluation, it is.


Moreover, what’s left of free-market pricing believes it is – check out these 30-day US Dollar Correlations:


1. SP500 -0.86 (inversely correlated with USD)

2. Commodities (CRB Index) -0.84

3. Gold -0.93


Yep, that’s that. The entire world is front-running Janet Yellen talking down interest rates in the face of #InflationAccelerating.


Since no one who calls the shots at either the White House or the Fed has ever traded macro market risk in their life, don’t expect them to get the most important aspect of risk managing markets – expectations.


If you want to look at the market’s most obvious expectations on US monetary and fiscal policy, look at futures and options positions in the CFTC (US Commodities Futures Trading Commission) data:


1. Gold = +123,007 net long contracts (vs. its 1yr avg of +60,763 contracts)

2. Crude Oil = +432,840 net long contracts (vs. its 1yr avg of +349,652 contracts)

3. US Dollar = -197 net short contracts (vs. its 1yr avg of +17,809 contracts)


In other words, front-running an un-elected cartel of Keynesian economists who make-up new policy rules as they go (the Fed) has turned into a big business on Wall Street. If you don’t believe that, tell yourself fairy tales too.


Like it did in Q1 of both 2008 and 2011, the market is expecting both Congress and the Fed to Devalue the Dollar in the face of slowing economic data. If you go back to the 2011 playbook, you can see that Gold, Bonds, and Utilities (XLU) were beating the Dow steadily.


To review what the market is front-running:


1. FISCAL policy – moar government deficit spending

2. MONETARY policy – talking down the long-end of the curve (rates)


On both of those currency vectors (yes, decisions your elected or un-elected bureaucrats make are causal), unlike last year (when both were Dollar Bullish with sequestration + tapering), Mr. Macro Market is taking the US Dollar to its YTD lows.


In other Global Macro news, Germany appears to be finally slowing. While it’s been a good run for the German economy off its European Crisis lows, here’s the real-time market update:


1. Germany’s stock market (the DAX) broke @Hedgeye TREND support of 9273 last week

2. Germany’s bond market has ramped in the last month with 10yr Bund Yield -10bps m/m to 1.56%

3. Germany’s ZEW (confidence reading) just dropped in March to 46.6 vs 55.7 in February


I know. If China, Japan, USA, and now Germany see the slopes of their economic growth curves roll over (all at the same time) what could possibly go wrong? Oh, and Russia (stock market -23% YTD) is still crashing. This story only ends well in some sadistic dream.


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




VIX 14.72-17.56
USD 79.21-79.79

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


This Story Doesn't End Well - Chart of the Day


This Story Doesn't End Well - Virtual Portfolio

March 18, 2014

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TODAY’S S&P 500 SET-UP – March 18, 2014

As we look at today's setup for the S&P 500, the range is 20 points or 0.69% downside to 1846 and 0.39% upside to 1866.                       










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.32 from 2.33
  • VIX closed at 15.64 1 day percent change of -12.23%

MACRO DATA POINTS (Bloomberg Estimates):

  • Federal Open Market Cmte begins 2-day mtg
  • 7:45am: ICSC weekly sales
  • 8:30am: CPI m/m, Feb., est. 0.1% (prior 0.1%)
  • CPI Ex Food and Energy m/m, Feb., est. 0.1% (prior 0.1%)
  • 8:30am: Housing Starts, Feb., est. 910k (prior 880k)
  • 8:30am:  Building Permits, Feb., est. 960k (prior 937k, revised 945k)
  • 8:55am: Redbook weekly sales
  • 9am: Net Long-term TIC Flows, Jan., est. $40.0b (pr -$45.9b)
  • 4:30pm: API weekly oil inventories


    • 8am: SEC Chief Economist Craig Lewis speaks at ICI
    • 8:30am: David S. Cohen, U.S. Treasury undersecretary for terrorism & financial intelligence speaks on virtual currencies at Bloomberg event
    • 9am: RNC Chairman Reince Priebus at Christian Science Monitor
    • 10am: DNC Chairwoman Rep. Debbie Wasserman Schultz at Natl Press Club
    • US. Election Wrap:  Illinois Race; Ads by Billionaires


  • Federal Open Market Cmte begins 2-day mtg
  • High-speed trading said to face New York probe over fairness
  • Russia creeps towards economic crisis as sanctions near
  • Malaysia Air disappearance among longest in modern aviation
  • Obamacare reshuffles insurance market share, report says
  • Wal-Mart plans video-game trade-in service March 26
  • Amazon to start selling video-streaming device in April: WSJ
  • Microsoft said to unveil Office for IPad on March 27
  • Target to sell products simultaneously with TV shows: NYT
  • Rep. Camp’s bank tax plan under attack from Wall St.: WSJ
  • Shell, Phillips 66 purchase majority of SPR oil sale
  • Italy may cut F-35 JSF order to 45 vs 90, Corriere says


    • Adobe Systems (ADBE) 4:05pm, $0.25 - Preview
    • Alimentation Couche Tard (ATD/B CN) 8:40am, $0.92
    • DSW (DSW) 7am, $0.29
    • FactSet Research Systems (FDS) 7am, $1.22
    • Hertz Global Holdings (HTZ) 6am, $0.32
    • Oracle (ORCL) 4:01pm, $0.70 - Preview
    • Pacific Sunwear of California (PSUN) 4pm, ($0.19)
    • Renren (RENN) 6pm, ($0.12)
    • Yingli Green Energy Holding Co (YGE) 6am, ($0.18)


  • Gold Extends Retreat From Highest in Six Months Before Fed Meets
  • Gold-Mining ETF Outshines Bullion Fund as Haven Bet: Commodities
  • Brent Trades Near Six-Week Low as Crimea Risk Fades; WTI Steady
  • Nickel Heads for Bull Market as Russia Clouds Supply Outlook
  • Corn Rebounds in Chicago Trading, Erasing Earlier Declines
  • StanChart Sees Global Sugar Deficit in 2014-15 of 1 Mln Tons
  • Ukraine Tackling Gas Corruption Means Potatoes for Poor: Energy
  • Default Risk for China Copper Financing Seen Low: StanChart
  • European LNG Imports Fell to 9-Yr Low in 2013 as Prices Rose: BG
  • French Flour Miller Vivescia Sees Market for Sustainable Wheat
  • April Jet Fuel Swaps Drop to Eight-Month Low: Asia Distillates
  • EU Mulls Renewables-Linked Aid to 62 Industries, Draft Shows
  • Thai Rice Crops Damaged as Drought Spreads Across 28 Provinces
  • Rebar Rises 1st Time in 3 Days on China Seasonal Demand Outlook
  • Agricultural Commodities Could Be “Next Big Story,” HSBC Says

























The Hedgeye Macro Team














Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

LULU: Survey Results Prequel #1

Takeaway: In advance of Round 2 of our LULU Consumer Survey, we’ll be revisiting some of the themes that caused us to turn bearish last fall

In advance of the release of Round 2 of our LULU Consumer Survey on Monday March 24th at 11:00am, we’ll be revisiting some of the themes that caused us to turn bearish last Fall.



As a reminder, we ran our first iteration of the LULU consumer survey in January. The impetus behind the study was to get a better understanding of how badly LULU's 2013 PR gaffes had damaged the brand. Our surveys are run through a third party vendor to ensure that the results are valid both statistically and methodologically, but we are always looking for data points to challenge our findings.



As background regarding our methodology, we should point out that LULU ran a survey similar to our own soon after Chip's comments and were pretty tight lipped about the findings. At ICR the company flashed one image about brand desirability that we poached and compared to our data set (see both charts below). We won't claim that our data set is a carbon copy to LULU's, but the similarities are telling and lead us to believe that LULU must have been looking at the same troubling trends we called out in January prior to the company's 4Q guide-down.


LULU: Survey Results Prequel #1 - LULU data

LULU: Survey Results Prequel #1 - hedgeye data



We’ll be calling out several items throughout this week. But one that we found particularly noteworthy is that there’s a gross disparity in pricing for LULU vs its’ competitors. Specifically, we asked consumers how much a pair of Yoga pants for each of the 17 brands that we used in our survey. The average price for LULU was $67, versus $45 for the rest of the industry. As you can see in the chart below, no other brand comes close. But when we charted the ACTUAL price of Yoga pants for each brand, we see that LULU is not even the highest, and several brands are within $10 of LULU’s $96 average price. The read-through is that the other pants are not materially more expensive, but consumers just think they are. That’s largely a function of discounting. At other stores, a shopper can find a pair of $90 pants, but get 2 for 1. But LULU has no real discounting strategy. Our sense is that in 2014, we’ll see that happen. Let’s see if the next round of our survey shows any improvement in the perceived value proposition.


LULU: Survey Results Prequel #1 - customer price

LULU: Survey Results Prequel #1 - ACTUAL PRICE


More analysis to come tomorrow. 

European Banking Monitor: Russia/Ukraine Divergences

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .




Relative Differences

The Russia/Ukraine/Crimea situation continues driving relative performance differences within the US Financials sector. Note the first callout below. The US global banks are underperforming while the domestically-focused institutions are outperforming, which is essentially the opposite of our preferred positioning. Meanwhile, Sberbank of Russia, which is essentially the Russian banking system, is seeing its CDS rise dramatically. Separately, the yield spread is compressed markedly last week.


If there is one silver lining domestically it is that commodity prices finally stopped going up, posting a 1% decline for the week. It's also worth mentioning that the US and EU interbank markets remain benign. 



European Financial CDS - Swaps mostly widened in Europe last week. Sberbank of Russia widened significantly, increasing 54 bps to 340 bps and finds itself now squarely in the red zone of +300 bps. Sberbank swaps are now wider by 103 bps month-over-month. Consider that Sberbank is to Russian banking what JPMorgan, BofA, Citi and Wells Fargo combined are to the US from a market share standpoint. Sberbank's credit default swaps are a helpful proxy for the Crimea situation.  


European Banking Monitor: Russia/Ukraine Divergences - zbank 1

European Banking Monitor: Russia/Ukraine Divergences - z bank2


Sovereign CDS – Sovereign swaps mostly widened over last week. The two exceptions included the US, which tightened 1 bp and Spain, which tightened 5 bps. 


European Banking Monitor: Russia/Ukraine Divergences - zz. sov1


European Banking Monitor: Russia/Ukraine Divergences - z. sov2


European Banking Monitor: Russia/Ukraine Divergences - z. sov3


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 2 bps to 14 bps.


European Banking Monitor: Russia/Ukraine Divergences - z. euribor


Matthew Hedrick




The Mall Says it All

Takeaway: A picture is worth a thousand words.

Editor's Note: This is a complimentary research excerpt from Retail Sector Head Brian McGough. For more information on our services, click here.

A Trip to the Mall

You don't often hear from us about our trips to the malls.


We're in there regularly, but the reality is that with about 1,100 malls in the U.S., it's just flat-out dangerous to go into a handful of stores and draw a conclusion.


That said, in a recent mall tour over the weekend, we took a bunch of pictures of things we thought were insightful. It’s not necessarily conclusive given the small sample, but interesting nonetheless.


Here's just a few of our takeaways:



This table of Sperry boat shoes in Lord and Taylor caught our eye in two ways. First, it looked horrible. But that's more to blame on Lord and Taylor. The second was that it was the only footwear display in the entire men's department that was not on sale. That sign on the right? It's marked as 'Everyday Value' at $89.95. 


Boat shoes are not going away.


The Mall Says it All - sperry



We have never, ever seen an athletic shoe store with more SKUs than this Skechers store. Seriously, it was almost painful to see all the models and color combinations.


Also, prominently displayed was its 'Designed for Speed' ad. Let's hope this foray into performance running works for Skechers, because it's been known to churn out a shoe that has a better chance of making your foot bleed than actually completing any marathon.


The Mall Says it All - skechers



Target looked simply horrible. The worst store in the mall. Full stop.


The biggest problem was being out of stock on items in key categories:

  • The two pictures on top show the footwear wall, where they sell vulcanized footwear, slides, and flip flops. 
  • The pictures in the middle were the most alarming, as they show the end-cap in the footwear department. Yes, this is the most valuable real-estate in the whole department, and it was completely barren.
  • The lower left photo shows how Target is getting ready for the spring bike season, which really should have been set a month ago. It was a wall of absolute nothingness.
  • Lastly, there's that picture to the lower right. I have no idea what this is. All I know is that it was painful to the eye. 

The Mall Says it All - target



This Coach store was rather sad. I stood outside waiting for someone to walk in. Total time elapsed was 5 minutes 30 seconds.


And for the record, the mall was otherwise reasonably crowded. 


The Mall Says it All - coach



On our trip to the mall, JCPenney was the anti-Target. Seriously. Everything was the exact opposite from Target. The store was clear, neat, and well merchandised.


The picture to the upper right shows a newly merchandised apparel area for women. It was very well lit, had great signage, and looked extremely inviting. The merchandise was not so bad, either.


Similarly, JCPenney’s footwear department beat Target’s poor showing. The athletic area -- albeit overly supplied with Nike products -- was clean and the product was competitive with what was in the Macy's down the hall. The women’s dress shoe department (shown in the lower right photo) was also world's above what we saw in Target. It was not just in how it was merchandised, but also in presentation and quality of merchandise.


And, one might say that JCPenney should  be well-above Target. Yes, that's true. But in the past, it wasn't.


The Mall Says it All - jcp



The worst thing about the FootAction store is that it was directly across from Abercrombie & Fitch, which soils the air with that horrible-smelling scent.   But we stayed in the FootAction store for a good 30 minutes (and bought something so we wouldn't be kicked out). After some painful accounting, our estimate is that 85% of the SKUs at FootAction are Nike/Jordan. That's simply astounding.


Finish Line had a great looking window, and the retailer is the only athletic store that dared dedicate some of its window space to a non-Nike brand. But we're puzzled that there's a big poster for the Spine footwear product, which is not the new UA footwear on the market (that would be the Speedform Apollo).


The Mall Says it All - footaction


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