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I'm Boorish!

This note was originally published at 8am on May 02, 2014 for Hedgeye subscribers.

“He is illiterate and boorish; austere and offensive.”

-The Mercantile Agency, May 1853


In some of Americas most formative years of free market capitalism and innovation, the authorities of perceived wisdom wrote that about one of the greatest wealth creators in US history – Cornelius Vanderbilt.


His response:


It is said that I am always in opposition, and that the same spirit of resistance which has often hitherto governed my action has influenced it now… I have only to say that this is the same spirit which founded this great Republic.” (The First Tycoon, pg 161)


And that’s all the man needed to say about that.


Back to the Global Macro Grind


In this day and age, the more real-time market illiterate a politician is, the more offensive (to me at least) he becomes. Other than the brilliant financial market mind that is Maxine Waters, these characters are usually he’s by the way – we men think we know everything.


While I can’t comprehend how consensus economists are getting to a +3-4% US GDP ramp in the coming quarters, I guess I’ll just have to be all boorish for the next few months and reiterate how ridiculous the Old Wall’s linear forecasting process has become.


On a cheerier note, it’s jobs Friday! And while I am sure everyone wants to know what Steve Liesman has for his NFP guess, my boy, Mr. Bond Market, has already front-ran the entire circus:


  1. US 10yr Yield got smoked yesterday to 2.63%, taking it DOWN 40 basis points YTD! (consensus is still short Treasuries)
  2. US 10yr minus 2yr Yield (The Yield Spread, which is a growth proxy) compressed another 3bps day-over-day
  3. As our long bond position (TLT) ripped to fresh YTD highs, anything equities that looked like a bond did too

NEWSFLASH (to those waiting on the next qualitative “survey” from our competitors): Bonds rip when growth is slowing.


Anything that looks like a bond is called #YieldChasing (they’re ripping too):


  1. Utilities (XLU) up another +0.5% yesterday (with the SPX flat) to new YTD high of +14.3%!
  2. REITS (VNQ) punched another fresh YTD high too up at +13.5% YTD

As for the 80% of America that is going to eat both inflation and growth slowing:


  1. US Consumer Discretionary Stocks (XLY) are still down -4.1% YTD
  2. US Housing (ITB) is still sucking wind at -4.9% YTD

For the style-factor illiterate who gets on TV and says ‘but the market is up’ (even though both the Nasdaq and Russell are down YTD), in mathematical terms we call this risk developing underneath the US stock market’s hood SECTOR VARIANCE. In chaos theory speak, variance rises when major macro factors are undergoing the initial stage of what physics fans call a PHASE TRANSITION.


Phase transitions (like water approaching a waterfall) are really cool, because consensus doesn’t realize what’s happening a foot below the visible surface… Then kabooom! A proactively predictable point of entropy occurs. Variance, Phase Transition, Entropy – offensive terms for those who haven’t evolved their process = excellent defensive strategies for you to deploy.


If you want to consistently beat beta in this game, you have to know A) when to go on defense and B) how to rotate offensively from that defensive position. More commonly known as sector rotation, you get what I mean. Our process takes the sector rotation idea up another 10,000 feet because we go all cross-country-cross-asset-class on you.


At the beginning of Q2, on the long side here’s where we continued to rotate to (Investment Conclusions – slide 48 of our Q214 Global Macro Themes deck, which all of our Institutional Research customers can get an updated copy of anytime):


  1. Bonds (BND)
  2. Long-Term Treasuries (TLT)
  3. Gold (GLD)
  4. Agricultural Commodities (DBA)
  5. Utilities (XLU)
  6. REITS (VNQ)
  7. India (EPI)
  8. Brazil (EWZ)

No matter what this jobs report says today, we want you to keep doing more of this because A) it’s still nowhere in the area code of consensus and B) it’s working.


Instead of calling us bearish, bullish, or boorish, I say you call us flexible. This is the opposite position our process suggested you be in at this time last year. Having resistance versus a broken consensus isn’t easy. But being a capitalist in America today isn’t either.


Our immediate-term Global Macro Risk Ranges are now (12 macro ranges with a TREND overlay are in our Daily Trading Range product):


UST 10yr Yield 2.59%-2.70%

Russell2000 1106-1145

Nikkei 14156-14601

VIX 12.96-14.72

USD 79.31-79.91

Gold 1279-1309


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


I'm Boorish! - Chart of the Day


TODAY’S S&P 500 SET-UP – May 16, 2014

As we look at today's setup for the S&P 500, the range is 21 points or 0.53% downside to 1861 and 0.60% upside to 1882.                            













  • YIELD CURVE: 2.14 from 2.14
  • VIX closed at 13.17 1 day percent change of 8.22%


MACRO DATA POINTS (Bloomberg Estimates):


  • 8:30am: Housing Starts, April, est. 980k (prior 946k)
  • 9:55am: UMich Confidence, May prelim, est. 84.5 (prior 84.1)
  • 12:20pm: Fed’s Bullard speaks in Little Rock, Ark.
  • 1pm: Baker Hughes rig count



    • 8am: U.S. Chamber of Commerce hosts discussion on infrastructure with participants including U.S. Ex-Im Bank Chairman Fred Hochberg, Rio Tinto CEO Sam Walsh
    • 10:30am: Vice President Joe Biden, Time Warner Cable CEO Robert Marcus attend Change the Equation’s National STEM Summit
    • 12pm: Congressional Internet Caucus Advisory Cmte holds discussion on “The FCC’s Internet Plans for an ’Open Internet’ and for the Auctioning of the Mobile Spectrum”



  • Credit Suisse said close to $2.5b deal in tax probe
  • Uber said to be in funding talks for $10b-plus valuation
  • Buffett trims GM stake while Einhorn exits amid record recalls
  • Berkshire adds Verizon stake as Vodafone deal reshapes carrier
  • Soros to Perry build Herbalife holdings as Bass buys stake
  • Rackspace hires Morgan Stanley to evaluate strategic options
  • J.C. Penney soars as sales gain for first time in 3 yrs
  • Applied Materials sales outlook tops analysts’ lowest ests.
  • Pinterest valued at $5b in $200m financing round
  • TrueCar auto-buying website raises $70m in U.S. IPO
  • GM’s latest recalls bring company’s total to record 11.2m
  • Drought and hurricanes bigger threats for world’s top cos.
  • Modi-led opposition poised for biggest India win in 30 yrs
  • Fed, BOE Minutes, U.S. Home Sales, EU Vote: Wk Ahead May 17-24



    • Onex (OCX CN) 7am, $0.32




  • Paulson Sticks With Gold Stake as Price Rises on Ukraine Tension
  • Brent Crude Set for Weekly Gain Amid Ukraine Tension; WTI Steady
  • Russian Steel Billionaire Mordashov Seeks U.S. Exit: Commodities
  • Wheat Rebounds as Drop Seen Overdone While U.S. Drought Persists
  • Nickel Advances in Rebound From the Biggest Decline Since 2011
  • Gold Narrows Weekly Increase as Investors Weigh U.S. to Ukraine
  • Coffee Retreats as Export Market ‘Well Supplied’; Cocoa Declines
  • Iron Ore Futures in Singapore Decline to Lowest Level Since 2013
  • Vermillion Hedge Fund Said to Start in Shanghai Free Trade Zone
  • China’s Local Nickel Price Points to More Refined Metal Imports
  • Uranium Retreat on Japan Delays Makes Banks Less Bullish: Energy
  • Kazakhstan Wants to Trade Grain With Iran Using Yuan for Payment
  • Gazprom’s Pipe Control May Hinder Independent Gas: Bear Case
  • Steel Rebar Drops for 3rd Week in China, Setting New Record Low

























The Hedgeye Macro Team














May 16, 2014

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JCP - Should Mike Stay Or Should Mike Go

Takeaway: Only one factor held JCP off our Best Idea long list. JCP's need for a permanent CEO. But truth be told, Ullman is getting it done.

Conclusion: The market share shift back to JCP is undeniable, which is consistent with our research. Our estimates remain far above consensus. That said, we’ve kept this name off our Best Ideas list as we've been a vocal critic of CEO Ullman, saying that he’s not the guy to unleash the $1.40+ in earnings power we see at JCP and that we need a permanent CEO. Based on the conference call it does not sound like he's going anywhere anytime soon. While that’s negative at face value, let’s give the guy credit…he’s getting it done. If he could keep this momentum going, then maybe he should stay. 



We were expecting a beat out of JCP based on the research we outlined on our JCP/KSS call on Tuesday (better visitation and spending statistics in our latest Consumer survey as well as clear signs that it was taking share from KSS online), but we were definitely not expecting a top line this strong. We modeled a 4% comp, but JCP came in at 6.2%, which is 780bps better than Macy’s and 960bp better than KSS.  Anyone who tries to argue that JCP is not regaining the $5.4bn in market share it gave away over the past three years is simply ignoring the cold hard facts. Our research shows that these two retailers are responsible for $1.0bn and $500+mm, respectively of that share shift. That’s a lot more meaningful for KSS in percentage terms, and we don’t think KSS sees JCP coming (or it’s simply in denial).


JCP - Should Mike Stay Or Should Mike Go - jcp11


There was so much in this quarter to like…a) positive traffic for the first time since before Johnson trashed the place, b) 26% growth in e-commerce – the first positive 2-year comp in 3 years -- during the same quarter that KSS dot.com slowed to the point where they stopped disclosing the exact number to the Street, c) continued improvement in Gross Margin -- +224bp vs. last year, d) only 1% growth in inventories on top of 6.3% revenue growth, which bodes well for GM% headed into the second quarter, e) a 6.4% decline in SG&A, which is great, though it’s an item that has a finite runway, and f) for the people that weren’t satisfied with JCP vastly improved balance sheet situation over the past 2 quarters, the company upgraded its credit facility such that it secured an extra $500mm in unsecured liquidity. Put all this together, and this is a really tough quarter to poke holes in. Most other retailers have nothing but excuses. JCP came through with nothing but results.


We’re taking up our estimates by roughly $0.20 each year out to 2018 (see Exhibit 2 below), which is largely a function of better revenue growth. That takes our ultimate earnings power up to $1.40. We’re still of the view that it will need to be a new CEO to realize that earnings power, and truth be told, we have more questions about that than ever.


From where we sit, Ullman is looking mighty comfortable in that CEO seat. In answer to a question about his future, he seemingly dismissed that there’d be a change up top anytime soon. We’ve been his most vocal critic, so at face value, we think this is a negative development.


But let’s keep ourselves honest here. We wrote above about how well the company is executing on its turnaround plan. Is it fair then to say that on one hand, and then push him out the door with the other? Probably not. Yes, we’d rather have a CEO who is 100% committed to JCP, has more horsepower, and who is financially incentivized to hit key value-enhancing targets over a very long time period. But for now, Ullman is proving to be exactly what the company needs. What we don’t know is whether he’ll wear out his welcome with a stock at $10, 12.50, or $15. It’s highly unlikely that it will be $20 – just as it won’t be $8.


The only other semi-negative factor we could pull from the print is the fact that JCP is now back to its former capacity of private label – which is 50% of total sales. That’s important because of the 500bp GM premium this product carries relative to National Brands (some was up to 800bp). There are two primary drivers to Gross Margin 1) improving the mix of Private Brands, and 2) sheer leverage of comp above fixed components of COGS. By a country mile, #2 is the more powerful driver, and that still has a long way to go. But it’s safe for us to assume that the GM improvement from mix and mix alone will be felt for the next 3-4 quarters and then level off. This is all represented in our above consensus estimates, so we’re not worried. But it’s an important flag.


JCP - Should Mike Stay Or Should Mike Go - jcp

Poll of the Day Recap: Majority See Fed Untaper This Year

Takeaway: 54.93% of voters overall leaned toward YES. The conviction of those who voted YES was 8.25% higher on average.

Yesterday on Fox Business’ Opening Bell, Hedgeye CEO Keith McCullough asked: “What if Janet Yellen untapers? If she untapers, gold is going to rip. If growth slows and surprises on the down side this year, she is going to do what she has been fundamentally trained to do, which is get dovish rhetorically, untaper and gold’s going to rip.”


That said, we asked you in today’s poll: What are the odds that Janet Yellen’s Fed UNTAPERS this year?


Poll of the Day Recap: Majority See Fed Untaper This Year - dollarshocked2

At the time of this post, 54.93% of voters overall leaned toward YES. The conviction of those who voted YES was 8.25% higher on average.

“Can't get and won't get the GDP growth needed this year, CPI is still deemed relatively low, and Fed believes higher inflation is controllable,” said one YES voter. “Therefore, attaining Fed deemed sufficient nominal GDP will require importing inflation (further devaluation of the dollar - #Untaper).  Two previous 100% tapers results were completely unsatisfactory.”


Another person who voted YES explained, “I happen to believe there is a significant risk of a greater than 15% decline in equity indexes over the course of the year. If that comes to pass, the Fed will do the same thing they've been doing for the last five years when we've experienced protracted weakness in equities. Sure the Fed may be all in favor of tapering with markets near all time highs but that tune will change in a heartbeat if markets turn significantly weaker.”


However, a greater number of NO voters expressed the reason for their choice:

  • “Bond buying process has too much visibility and impacts markets day to day in ways the Fed. IMHO wants to get rid of. They will develop a different method to ease with less visibility to replace buying bonds in the open market. Present process is probably actually hurting the economy rather than helping it.”
  • “Turning a large boat around (that is the fed) is very difficult. This year is too soon the Fed won't react that fast. While the Fed may get more dovish that does not mean they will untaper. While things have been slowing in terms of growth we aren't in a 2008-like risk event which everyone is freaking out about. Sure if you're long TWTR, AMZN and other growth names you're freaking out but who is shocked if a stock with a 1,000+ PE cuts in half?”
  • “I think the Fed knows: 1. the effect of QE on the real economy has been vacuous (even Yellen's own Fed in SF has said as much), and 2. the corruption of asset prices has become dangerous. Once they've started tapering its easier to keep going than to stop which would send out a panic signal and have limited effect on bolstering markets in any event.”
  • “What's a couple extra bucks at the pump or supermarket when you stand to make 250K a speech after leaving the Fed? #beardLady”
  • “The markets signaled their desire for the Taper long before Yellen came to the helm.  The Fed doesnt want to run a hedge fund, and the Fed holding steady on the Taper is a major calming factor for global markets.  I left 20% uncertainty: 10% because the Fed needs a margin of uncertainty, 10% for a geopolitical event like simultaneous Russia-Ukraine-Europe, and China-Japan-Vietnam wars.” 


Nickel Surges On Heavy Volumes

Although selling off sharply from the highs, Nickel has gone on a huge run over the last week to touch two-year highs on healthy volumes. The snapshots below from yesterday's close provide a good visual for the magnitude of the recent move. The volume table represents all active nickel contracts traded. 


Nickel Surges On Heavy Volumes - 05.14.14 Nickel Price.Volume


Nickel Surges On Heavy Volumes - 05.14.14 USD Cor


Nickel Surges On Heavy Volumes - 05.14.14 Standard Deviation



Without drawing any unfounded causality, a few data points surrounding the recent volatility are included below:


  • Last week VALE SA, one of the top 3 Nickel producing companies in the world, suspended its operations off the coast of the South Pacific Island of New Caledonia after a contaminants spill


  • BHP Hilton has recently announced its intent to sell its Nickel unit. To put a perspective on the margin pressure they have dealt with, the company’s net margin for the year through June 2013 from its Nickel unit was 1.8% vs. 41% in 2007  


  • Supply concerns surrounding the Indonesian export ban along with the Russian/Ukrainian conflict have fueled supply concerns: 


An axiomatic geopolitical dynamic may exist behind Indonesia’s ban of two major minerals in January, nickel ore and bauxite (commercial ore of aluminum). Two Russian companies, Rusal and Norilsk Nickel, the world’s largest aluminum and Nickel companies respectively, made a deliberate push for Jakarta to pass a controversial mineral ore export ban despite opposition from domestic mining companies and Asian buyers. The campaign was viewed as a positive for both parties at the expense of other global players in the space, namely China, Japan, and the U.S. Company personnel from both Rusal and Norilsk traveled to Indonesia repeatedly last year during a 6-month campaign in which they only agreed to spend billions of dollars on smelters if Indonesia banned nickel and bauxite exports.


Although China is becoming a significant trading partner with Russia, they will undoubtedly face supply constraints. China currently consumes 47.4% of Nickel produced globally:


Nickel Surges On Heavy Volumes - 05.14.14 Chinese Nickel Consumption


The campaign by Rusal and Norilsk was aimed at replacing costly capacity in Russia. The current regime in Indonesia has emphasized the need to earn more form its mineral resources. The export ban will force domestic mining companies to move up the production chain by pushing the processing of the minerals excavated. Jakartra denies having been influenced by either Russian company.


The ban will halt approximately $3Bn of annual exports and has probably helped propel Nickel higher this year (+45% YTD). The shares of both companies quickly rose over 10% in less than a month after the news hit. China and Japan are two of the largest buyers of Indonesian nickel ore, and Beijing is organizing a delegation of Chinese firms to travel to Jakarta to discuss the newly implemented rules. Japan is considering taking the Indonesian export ban to the World Trade Organization. The move has also hurt U.S. miners in Indonesia. Freeport-McMoRan and Newmont Mining Corp have now halted shipments and cut output due to a dispute over an escalating export tax under the new rules.



Macro Team





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