FLASHBACK | Gold: Is It Time to Get Back In on the Long Side?

Takeaway: Right now may be a bit early, but gold is shaping up to be a compelling long idea heading into 2014.

(Editor's note: This macro note "Gold: Is It Time to Get Back In on the Long Side?" was originally published on November 26, 2013. Hedgeye remains the non-consensus bull on Gold. It is up over +9% since 12/31/13.


CONCLUSION: Keith summed up our latest thoughts on gold in a brief @HedgeyeTV video this afternoon: The note below expands upon those high-level thoughts in greater detail, including our updated cyclical outlook for the US economy.


FLASHBACK | Gold: Is It Time to Get Back In on the Long Side? - goldd


Since the start of NOV, Keith has been trading gold with a bullish bias in our Real-Time Alerts signaling product. This has been a marked shift from having traded gold with a largely bearish bias since late 2011.


From a fundamental perspective, we now anticipate the emergence of distinct tailwinds that are increasingly likely to materialize over the intermediate term. As we detailed in last Friday’s Early Look, we think the most probable cyclical GIP outlook for the US economy is as follows:


  1. #GrowthSlowing: We think monetary and fiscal policy uncertainty (mostly monetary policy uncertainty) will weigh on consumer and business confidence. Furthermore, GDP comps get difficult as CPI/GDP deflator comps get easier, at the margins.
  2. #InflationAccelerating: We think domestic disinflation is now a rear-view phenomenon as easy comps and a weak dollar provide upward pressure on CPI and PPI readings.
  3. #IndefinitelyDovish Monetary Policy: We are increasingly of the view that the Fed is aware of the systemic risk present in the bond market and is potentially setting up to never commence tapering. They will likely accomplish this by setting far-too-aggressive targets for GDP growth and shifting their focus to combating a perceived risk of deflation, at the margins.

With regards to points #1 and #2, the confluence of #GrowthSlowing and #InflationAccelerating puts an economy squarely in Quad #3 on our GIP model:


FLASHBACK | Gold: Is It Time to Get Back In on the Long Side? - gold1


Historically, moves by the US into Quad #3 have been bullish for the price of gold, as both the US dollar and real interest rates tend to decline in this economic “state”; the opposite holds true on a move into Quad #1 (i.e. #GrowthAccelerating as #InflationAccelerates), which is where both the reported data and consensus expectations have tracked throughout much of 2013. Given where we’ve been on growth and inflation for much of the year, it would be modest to say that we are not surprised to see gold down almost -26% YTD (we’ve been the bears on gold for much of the past 12-18M).


FLASHBACK | Gold: Is It Time to Get Back In on the Long Side? - 2


FLASHBACK | Gold: Is It Time to Get Back In on the Long Side? - 3


Again, we think monetary and fiscal policy uncertainty (mostly monetary policy uncertainty) will weigh on consumer and business confidence and we’re already starting to see that in the high-frequency data:


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FLASHBACK | Gold: Is It Time to Get Back In on the Long Side? - 5


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That brings us squarely to point #3 as laid out above: we think Janet Yellen will prove to be the Mother-Of-All-Doves and, perhaps more importantly, we don’t think consensus agrees with this view. The latter point can be seen squarely in the aggregate futures and options positioning amongst speculators (the market has swung heavily into a net short bet on LT Treasuries):


FLASHBACK | Gold: Is It Time to Get Back In on the Long Side? - 7


With regards to how the Fed might get there, we continue to think they are out-to-lunch (i.e. way too high) with respect to their 2013E and 2014E GDP growth forecasts. Moreover, they are well below consensus on their 2013 and 2014 inflation estimates and the confluence of both gives them scope to:


  1. Not feel any pressure to taper in the next few months (because of the perceived “threat” of deflation); and
  2. Reset market expectations in the following months for when tapering will likely commence to consistently later-than-expected start dates (because growth, and the labor market, will likely surprise their expectations to the downside).


FLASHBACK | Gold: Is It Time to Get Back In on the Long Side? - 8


FLASHBACK | Gold: Is It Time to Get Back In on the Long Side? - 9


There are two caveats to the aforementioned charts:


  1. Our forecasts for growth and inflation in 2013E and 2014E are not locked in and are highly subject to change as new data feeds into the algorithm. What our GIP model is designed to do is provide a manageable range for the most probable directional adjustment(s) from the base rate in the absence of incremental evidence. Unlike traditional economic models, we don’t subscribe to the lick-your-finger method of making groundless assumptions about the future state(s) of the economy. Rather, we prefer to let market-based signals and fundamental (i.e. high-frequency) data guide our expectations on a rolling basis.
  2. The Fed’s forecasts for inflation are for the Core PCE Price Index, not headline CPI. It is very likely that Core PCE does not materially blow through the upside of the Fed’s official target given that: A) the target is a healthy +2% (and potentially higher if they decide to move the goalposts again); and B) there won’t be a ton of upside pressure on the rate of core inflation (via pass-through costs) if headline inflation isn’t projected to come in much higher than that.


All told, we think a waning threat of tapering, at the margins, is likely to serve as a positive catalyst for the price of gold – and other inflation hedge assets – over the intermediate term. The following chart, put together by our very own Christian Drake, highlights the causal relationship between #TaperTalk and the precipitous decline in the price of gold over the LTM:


FLASHBACK | Gold: Is It Time to Get Back In on the Long Side? - 10


Are you prepared for Janet Yellen to be a lot more dovish than the market currently thinks she will be? History would side with those of you who are, in fact, getting prepared for just that. The following is an excerpt from a late-2005 speech she gave on the housing bubble to the Conference on US Monetary Policy:


  • “How, then, should monetary policy react to unusually high prices of houses—or of other assets, for that matter?... The debate lies in determining when, if ever, policy should be focused on deflating the asset price bubble itself.”
  • “In my view, it makes sense to organize one’s thinking around three consecutive questions—three hurdles to jump before pulling the monetary policy trigger. First, if the bubble were to deflate on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble?”
  • “My answers to these questions in the shortest possible form are, “no,” “no,” and “no.””
  • “In answer to the first question on the size of the effect, it could be large enough to feel like a good-sized bump in the road, but the economy would likely to be able to absorb the shock.”
  • “In answer to the second question on timing, the spending slowdown that would ensue is likely to kick in gradually, because it mainly affects household wealth… So the impact of a gradual spending slowdown could well be cushioned by an easier policy.”
  • “In answer to the third question on whether monetary policy is the best tool to deflate a house-price bubble, there are several points to consider. For one thing, no one can predict exactly how much tightening would be needed, or by exactly how much the bubble should be reduced. Beyond that, a tighter policy to deflate a housing bubble could impose substantial costs on other sectors of the economy that would lead to equally unwelcome imbalances.”
  • “Taking all of these points into consideration, it seems that the arguments against trying to deflate a bubble outweigh those in favor of it. So, my bottom line is that monetary policy should react to rising prices for houses or other assets only insofar as they affect the central bank’s goal variables—output, employment, and inflation.”


CLICK HERE to access the full transcript of the speech.


Alas, if you thought her predecessor was cool with inflating the bond bubble and all the other intended and unintended #BernankeBubbles, then, by the looks of it, you haven’t seen anything yet. That is, of course, assuming a 67-year-old woman who’s been doing and saying the same exact things for ~50 years doesn’t have a massive change of heart upon taking office as the world’s most important government official – if not human being.


In the history of central planning, crazier things have happened, though. Stay tuned…


Darius Dale

Associate: Macro Team

Poll of the Day Recap: 60% Voted For Clear Spirits

Takeaway: 60% voted for Clear Spirits, 40% voted for Brown Spirits.

Hedgeye’s Consumer Staples team is interested in consumption trends of spirits as part of its alcoholic beverage coverage universe. So for today’s poll, we wanted to know what you're consuming more of this year; brown spirits (whisky, scotch, bourbon, brandy, cognac) or clear spirits (vodka, gin, rum, tequila, sake). Our poll question was straightforward:


Are you drinking more brown spirits or clear spirits this year versus last?



At the time of this post, 60% voted for Clear Spirits, 40% voted for Brown Spirits.


Those who voted for Clear Spirits had this to say:

  • I drink both bourbon and gin and have enjoyed exploring many of the new boutique products in both categories, but have spent more time exploring the gins.  There a simply a lot more to choose from now than a year or two ago.
  • I like to nurse scotch in the winter, but prefer clearer spirits in mixed drinks over the spring and summer, even leading into the early part of the autumn.  It's a seasonal issue.

Voters who chose Brown Spirits had this to say:

  • Recently, I have settled down a bit and my trend is more towards darker spirits, but much less consumption.  Back in my high consumption and possibly alcoholic days, I would consume large amounts of clear spirits. So overall, I think clear spirits have more potential to be consumed in mass, and if I were to suddenly decide to get re-open that can of worms, it would probably be back to the clear spirits if I were planning on buying in bulk and also consuming in bulk.
  • I'm not a character from Sex and The City. Clear spirit guys, enjoy your cosmopolitans with the little umbrellas!


Upon further review of Darden’s disastrous 4Q earnings release and outlook for FY15, we have updated some of our thoughts on the company’s vision for the future.  To be clear, following the divestiture of Red Lobster, we believe the company will struggle to pay its current dividend in FY16 without levering up.


For the sake of shareholders, Starboard must get control of the Board on September 30th.  Without a change of this magnitude, shareholders can expect more of the same: dismal returns, value destructive initiatives, and a complete disregard for shareholder concerns.


We’ve attached our commentary in a 12 page slide deck below.




Call with questions.


Howard Penney

Managing Director


Fred Masotta


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Just Charts – Grinding Higher


The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail on any material changes.


Just Charts – Grinding Higher - 1



6/25/14 GIS Earning Call 8:30am EST

6/25/14 TAP Analyst Meeting

6/26/14 PMI Investor Day 1

6/26/14 MKC Earnings Call 8:00am EST

6/26/14 CAG Earnings Call 9:30am EST

6/27/14 PMI Investor Day 2


XLP remains bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.

Just Charts – Grinding Higher - 1. xlp


The Hedgeye U.S. Consumption Model has shown steady improvement over the past month, with 5 of the 12 U.S. Economic Indicators flashing green.

Just Charts – Grinding Higher - 1. consumption indi


Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:


  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 20.0x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, but rose to 37.1 versus 35.5 in the prior week

Just Charts – Grinding Higher - 1. pe

Just Charts – Grinding Higher - 1.consumer comf

Just Charts – Grinding Higher - 2. us personal incfome





Quantitative Setup

In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).


Just Charts – Grinding Higher - a. bud

Just Charts – Grinding Higher - b. deo

Just Charts – Grinding Higher - c. ko

Just Charts – Grinding Higher - d. pep

Just Charts – Grinding Higher - e. gis

Just Charts – Grinding Higher - f. mdlz

Just Charts – Grinding Higher - g. kmb

Just Charts – Grinding Higher - h. pg

Just Charts – Grinding Higher - i mo

Just Charts – Grinding Higher - j. pm


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta



Takeaway: Top-down signals and bottom-up fundamentals support chasing Argentine equities (ARGT) to new highs.

On JUN 18 the US Court of Appeals for the Second Circuit lifted the stay on Judge Thomas Griesa’s (NY-Southern District) previous ruling after Argentina was denied an opportunity to have its case against bond restructuring holdout NML Capital heard by the Supreme Court two days prior.


This effectively forces Argentina to make good on $1.5B of overdue credit on JUN 30 (or be forced to via seizures of int’l assets) – the same day it owes an additional $900M to bondholders that took place in the country’s 2005 and 2010 restructurings of 92% of the country’s 2001 $95B sovereign default at 29 cents on the dollar. Moreover, the ruling prevents Argentina from prioritizing payments on restructured bonds over those of the holdout paper.


Argentine policymakers rightfully fear the ruling opens the country up to an additional ~$15B of likely claims by other holdout creditors – effectively putting more than half of the country’s $28.8B in FX reserves at risk. It’s worth noting, that Argentina uses FX reserves as it primary source of USD liquidity.




One key issue to monitor over the next week is that a clause in the aforementioned restructuring contracts prevents other bondholders from receiving better deals in subsequent negations – an option Argentine leaders have signaled they are likely to pursue.


This intention was stated less than a week after Argentine financial markets were roiled by Argentine President Cristina Fernandez de Kirchner and Economy Minster Axel Kicillof’s aggressive remarks following the decision to lift the stay; they referred to the decision as “extortion” and said they would attempt to transfer their restructured foreign law bonds to local legislation in order to skirt the ruling.


Specifically, the Buenos Aires Stock Exchange’s benchmark Merval Index dropped -10.9% and -4.9% on JUN 16 and JUN 19, respectively. The Argentine peso declined -6% the black market to 12.40 per USD on JUN 19, its first day back “trading” since JUN 13. Fast forward to today, the Merval Index is up +10.4% since last Monday (JUN 16) on what appears to be a change of heart among the Argentine brass with respect to the ruling and threats of technical default.




There’s follow-through in the bond market as well; the country’s 2021 notes have rallied 9.63 cents on the dollar from their JUN 16 low to 97.27. Argentina’s 5Y CDS have tightened -1190bps from their JUN 17 wides to 1437bps. The market likes what optically appears to be a shift, on the margin, in the direction of less-crazy policy out of the Fernandez regime. Her decision to eventually award Spain’s Respol $5.1B after their 2012 expropriation of YPF and her decision to settle $9.7B worth of obligations with the Paris Club in late-MAY is supportive of this view.



Source: Bloomberg

Perhaps the “Fernandez discount” is on the brink of being sustainably eroded. If that is the case, Argentina is a country that could stand to see increased international interest in its financial markets on the political change catalyst; in fact, Argentina is not unlike India or Brazil in this regard.


In addition to this, our TACRM system is giving us two thumbs up on the ARGT etf here. From a quantitative perspective, the index fund is signaling “buy” on an idiosyncratic basis and, from a top-down perspective, both EM Equities and Commodities remain “buys” at the primary asset class level. The latter is supportive of marginal improvement in Argentina’s creditworthiness due to likely improvement in the current account balance (commodities account for ~65% of Argentine exports).








We don’t think it’s prudent to build a materially sized position in Argentine stocks; nor do we think it’s a long-term holding without further color on the holdout negotiations or a continued willingness for the Fernandez government to be less crazy. Moreover, the country’s debt ladder would seem to suggest that it’s far from out of the woods; it owes $10.3B  to international creditors in 2015, $12.7B in 2017 and $12.1B in 2018.



Source: Bloomberg


Time will tell. For now, happy squirrel hunting!




Darius Dale

Associate: Macro Team


***To the extent you’d like to learn more about TACRM and how we apply its consistent and robust quantitative signals to our decision-making process, please review the following white paper, which can be accessed via the following link: In short, TACRM systematically distills actionable investment color from the global financial marketplace in a manner that is consistent with quantitative rigor that investors have come to expect from Hedgeye.***

LULU - Flash Call Wednesday 6/25 11am ET

Takeaway: We'll be hosting a flash call to discuss why we turned positive and added LULU to our Best Ideas List - tomorrow, June 25th, at 11am ET.

Please join us for a Flash Call on Lululemon (LULU) tomorrow, June 25th, at 11am ET. The purpose of the call is to review why we turned positive and added LULU to our Best Ideas list as a Long following the company’s latest disappointing quarter.


Simply put, our view is that things are so bad, that it’s good – and the subsequent activism by Chip Wilson supports that case.  Don’t get us wrong, Wilson is as much a liability now as he ever has been. But, we think that the path he’s marching down leads this company, and the stock, down an array of very defined outcomes - most of which are positive for LULU shareholders.  Our math suggests at least 3-to-1 upside/downside.


We’ll be exploring the following…

  1. A key focus for us is the decision tree facing this company based on Wilson’s effort to regain control of the Board. If he wins, certain things will happen. If he loses, there’s a completely different set of outcomes. We look at all outcomes that have a remote chance of happening and look at likely ensuing stock price.
  2. What obstacles does Wilson face in going activist on the company that he created? There are many. We’ve done the deep dive on the Board history and relationships.
  3. We’ll analyze the governance factors surrounding anyone who wants to influence this Board.
  4. What factors could lead to a take-out? Who could absorb a deal this big, and more importantly, who wants to?
  5. What’s the worst case scenario, and what would need to happen for us to back off of our thesis?
  6. Yes, there’s this thing called Selling Yoga Apparel. That matters. We’ll outline what fix we think the company needs in order to jump start its financial model.  



Toll Free Number:

Direct Dial Number:

Conference Code: 619868#

Materials: CLICK HERE


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 80.84%
  • SHORT SIGNALS 79.01%