Saving Pennies

“A penny saved is a penny earned.”

-Benjamin Franklin


I co-chaired the Bipartisan Policy Center’s dinner/debate on America’s Personal Savings Rate in NYC on Wednesday and one of the most thoughtful portfolio managers I know outlined the following to Senator Kent Conrad (ND) and Jim Lockhart (W.L. Ross):


My wife and I were in the military… we raised our 3 kids teaching them discipline and hard work… my kids all have savings accounts, jobs, and allowances… and my son did pretty well this winter shoveling snow. So I took him to the bank last weekend to make his cash deposit – he looked at his statement and said “Dad, I made 2 cents – why do we do this?”


Very good question, son. With an un-elected Federal Reserve mandate of 0% Rate of Return on American Savings accounts, what is the incentive for the next generation to save?


Saving Pennies - pen1


Back to the Global Macro Grind


Other than the bond and stock market bubbles blowing up, what is your incentive to be in cash this morning? As I was drawing down the cash position in our asset allocation model yesterday, I reminded myself to say my prayers before bedtime last night.


While prayer is not a risk management process, neither is a country destroying both the credibility of her youth’s hard earned currency and savings rate. As you can see in the Chart of The Day, the relationship between the US Dollar’s value and the ratio of personal savings to after-tax income is as obvious as the sun rising in the East.


Now back to dropping my Cash position to 20% yesterday. Damn the long-standing American principle of Franklin Frugality, Ben Bernanke and Janet Yellen have to be proud of me. With return on savings pinned at 0% and #InflationAccelerating, I’m going to go chase myself some hard core nominal yield!


What does chasing yield mean?

  1. The “risk-free” rate of return = 0%
  2. #InflationAccelerating > 2% means your real-rate of return owning 0% is negative
  3. You have to buy stuff (literally anything) that “yields”> 2%, just to break-even

Otherwise known as a Policy To Inflate, this un-elected and un-constitutional tax policy in America pays the debtor and pulverizes not only the saver, but the poor (hint: inflation is an unlegislated tax). And what does the NY Fed have to say about this? Go eat a REIT.


Seriously, let’s go through what you were forced to do in 2011 one more time, because that’s precisely what I am suggesting you do right now (until one day I say, I’m out, and go to 100% under-my-mattress beast mode):

  1. FOREIGN CURRENCIES (22%) – with a Down Dollar policy, buy other country currencies vs the US Dollar (Pounds, Euros, etc.)
  2. COMMODITIES (20%) – since most commodities correlate inversely to USD, buy Gold, Silver, Food – love Coffee!
  3. FIXED INCOME (19%) – yep, if it’s got a yield greater than 1-2%, giddy-up Bernanke Bond Bubble
  4. INTL EQUITIES (10%) – we like #StrongCurrency countries. Period.
  5. US EQUITIES (9%) – slow-growth Utilities, REITS, etc. - love Yield Chasing

Oh, that’s not the asset allocation pie-chart that the Banker-of-bailed-out-America-thundering-turd-high-net-worth-yield-chaser, slash “advisor”, has you in right now? I’m shocked.


With pick-toggles, junk bonds, and MLPs trading near all-time historical multiple highs, I don’t know why the Mucker doesn’t just go whole hog on this asset allocation strategy and go 30% Gold, 70% Kinder Morgan (KMP)!


As long as you realize that investing under this Bernanke/Yellen regime has nothing to do with reasonable valuations for anything that looks like a bond, you’re all set.


Back to the MLP bubble Bernanke will have on his #history watch:

  1. The US Equity market cap of MLPs 10 years ago was around $50B
  2. The all-time-bubble-high market cap for MLPs in 2013 was more than 10x that (over $500B)
  3. The all-time-bubble high in something like Kinder’s KMP in 2013 was 40x earnings

This is why someone like Rich Kinder should be considered a genius – he front-ran both Fed policy and the predictable behavior of human beings being forced to chase yield versus ZIRP (Zero Percent Rate Policy); not to mention the 50% rake he pulls from his LPs.


So, back to the NYC Portfolio Manager – what should we tell his son?


I say we tell him to roll-up some capital intensive assets (snow plows?), play around with the non-GAAP numbers, and collect massive fees from yield-chasing retail investors. Forget long-term principles of frugality and foresight in America. Pay me now. Beats 2 cents.


Our immediate-term Global Macro Risk Ranges are now:



VIX 13.18-15.36

USD 79.64-80.52

EUR/USD 1.37-1.39

Pound $1.64-1.66

Gold 1


Best of luck out there today – enjoy your weekend,




Keith R. McCullough
Chief Executive Officer


Saving Pennies - Chart of the Day


Saving Pennies - Virtual Portfolio

Imperial Ignorance

This note was originally published at 8am on March 07, 2014 for Hedgeye subscribers.

“I implore Imperial Heaven to pardon my ignorance.”

-Daoguang Emperor


Reigning over the Manchu Qing dynasty in China from 1820 to 1850, even by modern central-planning-overlord measures, this guy Daoguang was a whack job. He, like some in Big Government today, thought he was put on this earth to bend economic gravity.


But, “in 1832, Daoguang’s fears of looming crisis converged in one defeat… the government forces were not used to the mountains… many of the troops from the coastal garrisons were opium smokers, and it was difficult to get any vigorous response from them… When nature began conspiring against the Chinese empire… panic was likely to set in.” (The Opium War, pg 49)


So, don’t panic. Blame the weather.


I heard on TV that #InflationAccelerating slowing real US Growth is different this time. And the echoes of Daoguang’s ignorance has the New York Federal Reserve’s back on that: “I, the son of Heaven, am Lord of this World. Heaven looks to me that I preserve tranquility.” (pg 50)


Back to the Global Macro Grind


Yep, things are getting weird. And the President of the NY Fed, Bill Dudley, is getting weirder. You won’t remember him for being a below-average at best Keynesian economist at Goldman Sachs (1986-2007). He’s infamous for his completely out of touch with reality comment in March of 2011 that food prices ripping to all-time highs didn’t matter because iPads were cheap.


No, CRB Foodstuff’s Index fans (which is up another +1.6% this week to +14.0% YTD), you cannot eat an iPad. With US #InflationAccelerating to another fresh YTD high yesterday (CRB Index +10% YTD and the USD hitting another fresh YTD low), you can’t eat Gold (+12.1% YTD) either.


Imperial Ignorance - ipa


But Dudley, who completely missed calling for the 2008 crash, is comfy that the current growth slowdown is all about the “weather” and that US GDP is going to start tracking right back to +3%. As for the Fed’s dual mandate to raise rates when either employment recovers or inflation accelerates, yesterday Dudley called that “obsolete.”


In other dial-a-Fed guy (or gal) to Burn Your Currency news:

  1. The US Labor market data continued its deteriorating @Hedgeye TREND this past week
  2. NSA (non-seasonally adjusted) rolling y/y claims only dropped -3.5% last week
  3. The last 7 jobless claims data points (most recent data point 1st) = -3.5%, -4.4%, -5.6%, -5.1%, -5.7%, -7.3%, -7.9%, -8.5%

In other words, as our all-star-non-Keynesian US Financials analyst Josh Steiner said yesterday, “since we’re looking at the rate of change in year-over-year initial jobless claims, a more negative number is better as it implies a faster rate of improvement.”


That’s also one of the main reasons why we didn’t start to get bearish on inflation slowing real US growth until 8 weeks ago – the slope of growth, or continued improvement, in the US employment cycle. *Note: employment gains peak at the end of a cycle


Yes, we were the US employment #GrowthAccelerating bulls for all of last year, primarily because the rate of change in both weekly and monthly US employment data (leading indicators) was improving. That’s why the Fed should have started to taper in July-September 2012. They didn’t – because they act on a lag to lagging economic data.


To review how the Fed 1913 Act was supposed to work – it was a dual mandate:

  1. Full Employment
  2. Price Stability

In English, that means that the Fed is supposed to:

  1. Get looser (cut rates) when the rate of change in employment is deteriorating and inflation is slowing
  2. Get tighter (raise rates) when the rate of change in inflation is accelerating and employment is improving

Instead, the Bernanke/Yellen/Dudley Fed:

  1. Is now changing the goal posts on what was their official 6.5% employment target – Janet, we hit it too soon; change it!
  2. Will never fight inflation, so the bond market assigns 0% credibility to the Fed raising rates with #InflationAccelerating

That’s why Dudley’s March 7th, 2014 comments about the Fed Act of 1913 being “obsolete” are very much consistent with his comments about inflation in March of 2011 – eat it.


He’s un-elected and un-accountable to the American people. So, for now, like a Chinese bureaucrat posing as our god, he can say and do whatever he damn well wants. And yes, that will affect the credibility of your currency and liberty, in real-time.


So enjoy your US jobs report day in what has become the no-volume-American stock market casino. And pray that the Fed’s imperial ignorance on the impact of price-fixing rates at 0% never perpetuates a panic.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.59-2.77%

SPX 1848-1884

VIX 13.01-15.65

USD 79.49-80.22

EUR/USD 1.37-1.39

Gold 1321-1355


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Imperial Ignorance -  USD


Imperial Ignorance - rta44

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Takeaway: How consumers feel about mgmt has a considerable impact on LULU. Here’s the detail on what percent care, and whether they’ll come back.

This week we explored LULU's a) customer purchase cadence, b) customer loyalty, c) competition, d) reasons for leaving the brand -- and several others.  As a reminder, we'll be looking at the incremental change in these areas as well as the following factors when we host our call on Monday 3/24 at 11am ET.


  1. Does LULU need to begin a more aggressive discounting strategy?
  2. New brands are encroaching on LULU's turf, is that rate slowing or accelerating?
  3. What is LULU's perceived price/value equation relative to other brandsand how is that changing?
  4. Growth in points of distribution for Yoga product - a key competitive threat for LULU.
  5. Insight into our store overlap analysis between Athleta and Lululemon
  6. UnderArmour scored so close to Nike in our last survey - which was a big surprise. Nike has been fighting back. Is it working?
  7. Is the 'I hate LULU Management!' factor (present in 58% of people responding last time) - still as severe? Any improvement? 


To cap off just a few of the highlights of our last survey, here are a few charts showing factors related to corporate management.  We showed this chart yesterday, but it's an important reminder that one of the most notable factors that drove people from the brand was that they dislike corporate management.




Separately, we asked people whether they are aware of the comments that Lululemon senior management made in public in November.  To be clear, we did not state who the person was, and we certainly did not say what the comments were. We did not want to lead the witness.  If we asked Wall Street about these comments, we'd get about 98% of people who heard of them. But The Lululemon customers we surveyed came in at 58%. We can all read that a different way, but our view is that this is a HUGE percentage for your everyday follower of the brand.


Then we asked that 58% if those comments impact the Lululemon brand, and 67% said Yes. We're hoping -- for LULU's sake -- that this number comes down dramatically when we crunch through our results over the next couple of days.


Lastly, we asked how these comments will impact shopper behavior.  10% of the people said that they'll never shop at Lululemon again…which is tough to overcome, 38% said that they'll spend less, and 16% indicated that they simply don't care and will likely spend more. About 36% seem neither positive or negative.


It's good that there's a big proportion of customers that are unaffected, but having 48% that are on the net negative side as it relates to spending intent is not what we want to see from a growth brand.  The update here should be interesting.






TODAY’S S&P 500 SET-UP – March 21, 2014

As we look at today's setup for the S&P 500, the range is 35 points or 1.12% downside to 1851 and 0.75% upside to 1886.                                 










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.34 from 2.35
  • VIX closed at 14.52 1 day percent change of -3.97%

MACRO DATA POINTS (Bloomberg Estimates):

  • 11:45am: Fed’s Bullard speaks on panel in Washington
  • 1pm: Baker Hughes rig count
  • 1:45pm: Fed’s Fisher speaks in London
  • 4:30pm: Fed’s Kocherlakota speaks in Washington
  • 7:20pm: Fed’s Stein speaks in Washington


    • House, Senate out of session
    • 8am:  Moniz speaks with reporters, analysts at BGOV breakfast
    • 8:30am: SEC Chairman Mary Jo White, FCC Chairman Tom Wheeler speak at Consumer Federation of America assembly
    • 10am: Vice President Joe Biden speaks at National Assn of Community Health Centers’ policy forum


  • Gunvor co-founder exits ownership stake as U.S. sanctions hit
  • Sanctioned Bank Rossiya says MasterCard, Visa halt service
  • Banks’ split with Fed on stress may risk shareholder payouts
  • Volcker rule seen costing banks as much as $4.3b: OCC
  • JNJ, Takeda, Roche may receive EMA decisions
  • U.S. keeps AAA rating by Fitch as outlook raised on debt pact
  • Malaysia jet’s steady flight has Australia scouring ocean
  • No positive news yet from satellite search for jet: Malaysia
  • Families seek truth after evasive responses from airline
  • Netflix CEO calls for stronger rules on web traffic handling
  • Nike sees weaker-than-expected sales gain after profit beat
  • Macondo partner Anadarko’s e-mails seen showing role in well
  • Dow, Eastman Chem. back group airing ads to protect senators
  • Chrysler truck sales rise vs those of GM, Ford, WSJ says
  • Obama in Europe, Stress Tests, Microsoft: Week Ahead March 22-29


    • Darden Restaurants (DRI) 7am, $0.88
    • Tiffany & Co. (TIF) 6:59am, $1.52 - Preview


  • Copper Rises to Trim Weekly Decline as Price Drop Spurs Demand
  • Palm Output in Indonesia Climbing for First Time in Six Months
  • Coffee Belt in Vietnam Poised for Rains Easing Threat of Drought
  • Gold Trims Weekly Decline as Ukraine Crisis Spurs Haven Demand
  • Brent Set for Fourth Weekly Loss Amid Russia Clash; WTI Rises
  • Canada’s Grain Backlog Seen Persisting With More Oil Shipments
  • Palm Heads for Second Weekly Loss as Indonesian Output Increases
  • Global Energy Thirst Threatens to Worsen Water Scarcity, UN Says
  • Wheat Trims Weekly Advance as Dollar Rally Seen Curbing Demand
  • Hot-Rolled Coil Futures Debut in Shanghai to Complement Rebar
  • Baoshan Is Top Steel Stock on China Car Demand: Chart of the Day
  • Russia Senate Clears Crimea Annexation as EU Boosts Ukraine Ties
  • Copper Traders Are Bullish on Speculation Prices Slumped Too Far
  • Copper Advances to Trim Weekly Decline: LME Preview
  • WTI Oil Seen Dropping in Survey on Rising U.S. Crude Supplies

























The Hedgeye Macro Team














March 21, 2014

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