TODAY’S S&P 500 SET-UP – June 20, 2014

As we look at today's setup for the S&P 500, the range is 37 points or 1.66% downside to 1927 and 0.23% upside to 1964.                                                 













  • YIELD CURVE: 2.19 from 2.17
  • VIX closed at 10.62 1 day percent change of 0.09%


MACRO DATA POINTS (Bloomberg Estimates):


• No major economic reports scheduled

• 1pm: Baker Hughes rig count



    • House in session; Senate schedule TBA
    • President Obama meets with New Zealand PM John Key
    • SEC Chairman Mary Jo White speaks at Economic Club of N.Y.
    • 9am: House Judiciary hearing on net neutrality/antitrust law, w/FTC Commissioner Joshua Wright
    • 9am: House Ways/Means Cmte hearing on IRS treatment of tax-exempt orgs.
    • 9am: House Maj. Whip Kevin McCarthy, Rep. Paul Ryan, N.J. Gov. Chris Christie speak at Faith and Freedom Coalition
    • 9:30am: House Nat. Resources panel  Nat. Gas Gathering Enhancement Act (H.R. 4293), Energy Infra. Improvement Act (H.R. 1587)
    • 9:30am: House Veterans’ Affairs Cmte hearing on Sr. Exec. Service performance subpoena



  • Shire rejects AbbVie’s $46.5b takeover bid as too low
  • Siemens lifts Alstom Energy bid to $19.9b, defying GE
  • Obama sending advisers to give Iraq time to form govt.
  • Energy Transfer “high level” talks to acquire Targa terminated
  • BofA must face U.S. suit claiming mortgage-securities fraud
  • Oracle sales, profit miss estimates amid transition to cloud
  • Icahn urges Family Dollar CEO to seek sale “immediately"
  • Revel casino files for bankruptcy, seeking savior at auction
  • U.K. May budget deficit little changed after 1-time 2013 boost
  • NYC Fifth Avenue tower sells to Thor-led group for $595m
  • Verizon said meeting with Dish on possible spectrum sale: NYPost
  • U.S. GDP, Housing Data, Nike, Wimbledon: Week Ahead June 21-28



    • CarMax (KMX) 7am, $0.67
    • Darden Restaurants (DRI) 7am, $0.94



  • Gold Options Signal Sustained Rally as Yellen Shakes Out Boredom
  • Brent Heads for Second Weekly Gain on Iraq Violence; WTI Steady
  • China Miners’ Loss Is BHP Gain as Iron Slumps 44%: Commodities
  • LNG Rally Fading on New Supply as Nukes Set to Restart: Energy
  • Copper Gains Most in Three Weeks as Zinc Trades at 16-Month High
  • Gold Falls With Rally Seen Overdone as Investors Close Positions
  • Soybeans Slide on Expectation U.S. Farmers Expanded Planting
  • Asia’s WAF Purchases for July Stable; Nigerian Imports to Rise
  • Digital Shipping Platforms Cutting $684 Million Errors: Freight
  • Rising German Coal Use Imperils Emissions Deal: Carbon & Climate
  • Kansai Electric Said to Agree With Cheniere to Purchase U.S. LNG
  • RBI, Finance Ministry Said to Work on Iran Oil Payment Process
  • Energy Traders Pay More Than 100 Million Euros to Meet New Rules
  • China Metal Probe to Push Copper to LME Depots: Chart of the Day


























The Hedgeye Macro Team














ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher?

We continue to field arguments against the inflationary read-through on the commodity squeeze. Sharp increases in livestock and poultry prices over the last ten years in the face of stagnant wage growth, a decline in savings rates, and a declining U.S. dollar illustrate this reality in staggering fashion.


If Janet Yellen’s commentary yesterday is any indication, the fed will continue to promote yield-chasing from financial intermediaries and those lucky enough to hold equities and fixed assets. The PCE survey from the BLS reports the top quintile of income earners takes 66% of the aggregate income in the basket from interest, dividends, and investment related income. Needless to say, a majority of Americans consume meat.


2013 Meat Consumption Per Capita (KG/Person):

  • United States: 106.9
  • China: 53.5
  • World Average: 34.9

The average consumer we have continuously highlighted is reaching insolvency. Median net income margins have consistently compressed over the last five years to about 1.38% with savings rates decreasing over the same period.


Last Ten Years:

  • USD Index: -9.8%
  • Trailing 1-year U.S. Personal Savings Rate: -9%
  •  S&P GSCI Livestock Index: +69%
  • U.S. Private Sector Avg. Hourly Earnings (Real): -43% 


ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher? - 10 year chart usd vs. gsci vs. savings rate


A survey from both the USDA and the University of Oklahoma’s Department of Agricultural Economics this week provide evidence that people are eating the higher price tags (adding to the pain, they drove to the store --> WTI and Brent hovering at 9-month highs).

  • “This month’s survey shows consumers are willing to pay 11-35% more for steak, pork chops, and chicken wings"

-       Food Demand Survey from the University of Oklahoma’s Department of Agricultural Economics


  • The USDA’s Weekly Retail Beef Feature Activity Report highlighted a sharp decline in the number of food retail outlets featuring beef


ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher? - 10 yr. price chart


Last Ten Years:

  • Live Cattle: +71%
  • Lean Hogs: +65%
  • Chicken Breast: +40%


 ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher? - 06.19.14 Performance Table


Disease or not contributing to the advances YTD, this kind of headline inflation is tangibly relevant on the wallet. Unfortunately most people were not granted the opportunity to add to their inflation hedges out of the FOMC statement yesterday where the Fed provided a downward revision to its 2014 GDP estimate for the SEVENTH year in a row:

  • Headline CPI printed at +0.4% Tuesday vs. +0.2% expected (Inflation surprises)
  • Full-year growth estimates cut to 2.1-2.3% from 3% at the Fed (coincident response as growth misses)
  • 16 of 19 commodities in the CRB in positive territory on the year (prospect for future dollar devaluation increases; dollar down, cost of living up)

 ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher? - 05.27.14 Median Consumer Overview  2



Ben Ryan


Poll of the Day Recap: 75% Are Feeling The ‘Pinch’ of Higher Prices

Takeaway: 75% voted YES; 25% voted NO

Keep doing the same thing we have been saying all year, buy #InflationAccelerating and slow-growth #YieldChasing assets.


Everywhere you look these days, prices are going up. Meats, poultry, eggs and fish prices just hit an all-time high. U.S. rents are at an all-time high. Gas prices are soaring again. Etcetera, etcetera. 


We wanted to know if your wallet was feeling it too: Are you personally feeling the ‘pinch’ of higher prices?


Poll of the Day Recap: 75% Are Feeling The ‘Pinch’ of Higher Prices - pinch 


At the time of this post, 75% voted YES; 25% voted NO.


Those who voted YES had this to say:

  • Yes, most definitely.  Ironically, I was at Sam's Club yesterday and picked up a few items.  I would have liked to purchase a few steaks as I've done in the past.  I didn't purchase any steak as it's a bit of a luxury item and I need to be even more frugal than I typically am with three teenagers at home.  Now, I try to make bulk purchases of hamburger when it's on sale (about $3.50 a pound) along with other grocery items.
  • I'm noticing but I'm fortunate that its not changing my life now. I worry about small business people from landscapers to limo drivers to food trucks whose inputs are spiking. They are suffering and sooner or later we will all start to pay as they have no choice but to raise prices.
  • Commodity prices are inflating, driving energy and food prices up, due to a weak dollar and higher percentage of disposable income (due to low wages) spent on them (higher demand).
  • I increased the rent 30% on an apartment and I found a new tenant before even advertising it.


Those who voted NO reasoned:

  • It's a matter of adjusting family spending accordingly.  Prices are higher, but, just like another comment, good home budgeting matters.  People are generally wasteful and buy unnecessary things to "keep up with Jones'” -- so if they're feeling it and "can't" manage it, it's no surprise.
  • Prices are definitely higher, but not feeling it yet... good home budgeting, good cash flow management, and earning a good job trump poor monetary policy... my next move is a new car with better gas mileage.
  • Prices are noticeably higher, but I'm not feeling the pinch. This question could have rephrased to focus more on the economic impact of higher prices on people and the markets.
  • "Pinch"?  What "pinch"?  The Fed says there's no inflation. I mean, if we can't trust our own government...


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

Would Controversial American Apparel CEO Dov Charney Have Been Ousted If Stock Was $100?

Takeaway: If this was a $100 stock (or even a $10 stock) the Board would tolerate a lot more than if it were trading at $0.64.

Editor's note: This is an excerpt from retail sector head Brian McGough's morning research. Click here for more information on options available to Hedgeye subscribers.


APP - American Apparel Board Suspends Dov Charney as CEO and Declares Intent to Terminate Him for Cause; Names John Luttrell as Interim CEO


Would Controversial American Apparel CEO Dov Charney Have Been Ousted If Stock Was $100? - dov

  • "The Board of Directors of American Apparel, Inc. today voted to replace Dov Charney as Chairman and notified him of its intent to terminate his employment as President and CEO for cause. It is expected that the termination will be effective following a 30-day cure period required under the terms of Mr. Charney's employment agreement."
  • "'We take no joy in this, but the Board felt it was the right thing to do,' Mr. Mayer said. 'Dov Charney created American Apparel, but the Company has grown much larger than any one individual and we are confident that its greatest days are still ahead.'"


Key Takeaway: While it comes as no surprise that Charney was pushed out due to issues with his personal conduct and poor judgment, we find it hard to believe that this had absolutely nothing to do with the company’s performance.


If this was a $100 stock, or even a $10 stock (and probably even a $5 stock) the Board would tolerate a lot more than if it were trading at $0.64.


The key takeaway from where we sit is that Charney owns 27% of this company and the board, acting in the best interest of its shareholders, made the decision to disconnect the founder from the company. One other situation comes to mind. Chip Wilson at LULU who also owns 27%.



Takeaway: The $4T increase in TTM equity + housing wealth could translate into ~100bps of wealth effect spending - with the risk to the downside.

UPDATING THE IMPACT:  Post-recession monetary policy has explicitly targeted asset re-flation in hopes of the ultimate trickle down & around effect as the beneficiaries of that policy jumpstart aggregate demand via rising consumption and investment spending. 


With the incremental tapering announced yesterday and as the committee moves towards a complete cessation of wealth effect policy targeting, we thought it worthwhile to highlight the magnitude of housing and financial asset price inflation over the TTM and the implied wealth effect impact.   


Below we reprise a note we published last year, updating the numbers for the latest, 1Q14 household sector housing and equity asset values from the Feds Flow of Funds report.   We largely focus the discussion around housing wealth due to the broader set of considerations, but the same conceptual framework holds for financial assets.   



WEALTH EFFECT - WHAT IS IT:  When home prices rise at a premium to inflation, real housing wealth increases.  The wealth effect ‘theory’ posits that when real housing wealth increases, consumer spending permanently increases by some fraction of that wealth increase in every subsequent year - the same idea applies to financial assets.  It’s the “some fraction” part of the theory that sits at the center of ongoing research and debate.  


Consumers, on balance, don’t immediately convert 100% of a wealth increase into current consumption.  Instead, in annuity like fashion, they tend to spread that ability for increased consumption out over their lifetime


Economists attempt to quantify this phenomenon - how consumption changes following changes in housing wealth  - by measuring “Marginal Propensity to Consume” – the term used to describe how much consumer spending increases for each additional dollar of housing/financial asset wealth.  In general, studies examining the marginal propensity to consume show that consumer spending increases between 2 and 7 cents for each dollar of housing wealth increase.   


Actual increases in housing wealth as well as expectations around future price appreciation are thought to be the lead factors driving consumption and spending decisions.   The important, if obvious point, here is that even if home price appreciation is positive, if it’s less than what consumer were expecting (& basing spending decisions on) then the impact to go-forward consumption would be negative, and vice versa.  Households would increase/decrease their savings rate to close the delta between expected and actual housing wealth changes.     



KEY CONDITIONS It makes intuitive sense that an increase in real wealth, be it from housing or financial asset appreciation, lends itself to increased consumption.  However, a number of key, practical conditions must be satisfied for increased housing wealth to translate into higher consumer spending on non-housing related goods and services.    

  1. Non-housing Assets:  Rising home values don’t serve as direct means for increased consumption.   Housing wealth increases need to displace other savings and investment for it free up cash flow to drive higher discretionary consumption.  Put differently, an increase in housing wealth only drives increased consumption if households hold fewer non-housing assets than they would otherwise have held.  Historically, real increases in housing wealth have been associated with a decrease in the personal savings rate.  In effect, individuals let their home do their saving for them while diverting  would-be savings into greater current consumption.
  2. Equity Extraction:  Home price appreciation can help drive non-housing related consumption if it causes households to extract equity via increased borrowing, generally via cash-out refinancing’s (the technical term for this is Net Mortgage Equity Withdrawal, or MEW).  Additionally, households can extract equity by simply moving to a cheaper residence with the dollar delta between the two homes representing the increased capacity for non-housing related consumption.         

In short, if real housing wealth increases but households don’t decrease savings/other investment, increase home equity backed borrowing, or downsize to a cheaper residence, then that wealth increase will be largely ineffectual in driving higher consumption growth.   


Net-Net, What Kind of Impact Will Increased Housing and Financial Wealth have on Consumer Spending and Consumption Growth? 


The idea of the Wealth effect remains a working theory with the net impact to GDP beholden to a host of situational specific and idiosyncratic economic and behavioral/psychological factors. 


Despite the inherent uncertainty, applying a few simplifying assumptions allows for a reasonable estimation of the net impact to consumption stemming from a real housing and equity wealth increase.


In the scenario analysis below we applied the range of historical estimates for Individual’s Marginal Propensity to Consume (MPC) against the actual increase in aggregate, gross housing market and corporate equity values from 2013 to 2014 (Fed Flow of Funds Data). 


Across the range of MPC’s, on a nominal GDP base of $17.1T, the realized $2.3T increase in gross housing market value translates to 41-97 bps points of incremental growth while the $2.0T rise in equity values translates to 36-84 bps of incremental growth.   


On the housing side, against the estimate of gross wealth effect impact, we applied a series of discounts to arrive at a net impact:

  1. Negative Equity discount:  Is a rising home price really going to drive incremental spending for an individual going from very negative equity to less negative equity – particularly with wealth losses concentrated in the lower tiers where MPC’s are highest?  As of year-end 2013, approximately 13% of all homes were underwater – implying that 87% of homeowner are subject to the wealth effect.  We applied a 15% discount to the Gross Wealth Effect impact to account for negative housing equity in the analysis below.
  2. MEW Discount:  Net Mortgage Equity Withdrawal peaked at ~$140B during the housing bubble and subsequently went negative into and after the great recession.   Here, we take a conservative view and side with the preponderance of data that says the consumer still isn’t in a mood or position to re-lever.  We applied a 10% discount for MEW with the expectation for a depressed impact versus historical precedent.   
  3. Confidence/Psychological Discount:  Expectations around wealth increases play an important part in marginal spending decisions.   Similar behavioral dynamics tend to characterize positive and negative price/wealth inflections, but they tend to play out in converse – a phenomenon which is largely tied to expectations.  Individual expectations around future price changes are generally biased by ‘State Dependence’ (ie. how you feel now) whereby recent price trends color expectations around future price changes.   Applied to housing,  as home prices rise/accelerate, consumers generally extrapolate forward similar levels of price appreciation. Conversely, coming out of a period of declining prices, expectations around future price changes are probably conservative with consumer needing to see sustained stability/appreciation to drive incremental spending.  We applied a 5% discount for this dynamic in the scenario analysis below.     

IMPLIED NET IMPACT:  A quasi-conservative approach at quantifying the flow through impact from increased housing and equity wealth to consumer spending suggests we see a collective 80-130bps of incremental consumption growth over the NTM. 


Its worth noting that the marginal propensity to consumer for wealthy households (ie. the one’s who own financial assets) is typically lower than that of middle and low income households. 


Further, the distribution of still under water homeowners is concentrated in the lower price tiers – again, in the group where MPC’s are highest.  Given these two realities, actual wealth effect spending is more likely than not to be below both historical precedent and the implied impact in the scenario analysis below.    





Christian B. Drake



U.S. Senator Committee on E-Cigs Lobs Harsh Criticism Yet Science Inconclusive

Yesterday a Senate Commerce, Science and Transportation Committee met to discuss e-cigarettes and lobbed harsh criticism on marketing and promotional practices. Craig Weiss (NJOY President and CEO) and Jason Healy (blu President) were the two witnesses representing e-cigarette manufacturers, and more specifically their respective companies. (A video of the hearing can be found here)


We had the opportunity to speak with Craig Weiss about NJOY and the industry on 10/31/13 (see his presentation to Hedgeye)


Key Take-Aways From the Hearing:

  • The Committee included Senators Jay Rockefeller (D-W.VA), Barbara Boxer (D-CA), Richard Blumenthal (D-CT), Amy Klobuchar (D-MN), Bill Nelson (D-FL), Dick Durbin (D-IL), and Ed Markey (D-MA)
  • The Committee is tasked with consumer protection and issued numerous examples of how e-cigarette manufacturers are marketing to youth (under 18 years of age)
  • The Committee cited using celebrity spokespersons for marketing such as Jenny McCarthy and Stephen Dorff for blu e-cigs to cartoon caricatures of bazooka bubble gum for flavors and e-juice as evidence of manufacturers creating a lure for youth to participate in the category
  • The Committee cited a recent CDC report showing that the use of electronic cigarettes by middle school and high school students doubled from 2011 to 2012 and a study from RTI International and the Florida Department of Public Health published in the Journal of Pediatrics that showed exposure to electronic cigarette advertising jumped 256% from 2011 to 2013 among adolescents aged 12 to 17
  • Both Healy and Weiss were firm that no minor should be using any nicotine containing products, but they did not agree with the Committee to stop marketing on TV, Film, Print, Online, but did agree to stop the use of caricatures and cartoons in their advertising. They both also stressed that they market only to adults (a position the Committee found highly dubious) and Healy supported the claim against marketing to minors in stating that blu’s average age of consumer is 51 years old
  • It’s no coincidence that the timing of the hearing falls shortly before the conclusion of the FDA’s comment period on its proposed regulations for e-cigarettes (July 9th)
  • The FDA’s proposed regulations of e-cigarettes (on 4/24/14) were met by the industry with excitement as they were deemed “light”: no ban on marketing, flavors, or online sales
  • We suspect that if the these proposals are passed the rule stands to benefit Big Tobacco’s deep marketing pockets (LO - blu; MO - MarkTen; RAI - Vuse) and companies with significant private investment like NJOY
  • While we would not be surprised to see the FDA curb marketing, flavors, and online sales in the future, we expect the FDA to remain grounded in a science based approach in evaluating the e-cig category
  • We see evidence of FDA’s flexibility in Mitch Zeller, the head of the FDA’s Center for Tobacco Control, who continues to say: “We have to have an open mind on the potential for these emerging technologies to benefit public health.”
  • To date we expect the FDA to conclude that the science is inconclusive, given both the newness and ever-changing aspect of the technology. This should equated to limited restrictions and therefore be supportive of the industry

Statements from the Committee were highly impassioned, with perhaps the harshest words coming from Senator Rockefeller in addressing Weiss and Healy: “I’m ashamed of you. I don’t know how you go to sleep at night. I don’t know what gets you to work in the morning except the color green of dollars. You are what is wrong with this country.”


Our preferred tobacco name remains Lorillard (LO), owner of blu e-cigarettes, which has the leading market share in the U.S.  Email or call me if you’d like to discuss our investment thesis on LO. 


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


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