Incarcerating Investors

“Who wouldn’t invest in that?”

-Matt Taibbi


That’s what Matt Taibbi (of Rolling Stone fame) asked about incarcerated Americans. I read his recent rant of a book, The Divide, while I was on vaca last week and he made an interesting point: “the very brokest people in America, Hispanic immigrants, are one of America’s last great cash crops” (pg 217).


Incarcerating Investors - taibbi thedivide c10a7d26a1bcacd568ecc9eec422a64d3df77b32


Long Big Government via the slammer? It’s actually an epic growth chart if you look at it from 1. If you don’t want to be long what’s born out of central-planning-policies-to-inflate (Slow-growth bonds, utilities, REITS, etc.), it’s just another way of being downright bullish on the bearish realities of America.


On that score, alongside my six man Jedi Macro Team, I’ll be presenting our Q314 Macro Themes of #Q3Slowing, #DollarDevaluation, and #Volatility’sAsymmetry at 11AM EST today. Ping our team if you’d like access to the slide deck and conference call. I’m inviting Ed & Nancy.


Back to the Global Macro Grind…


With Utilities (XLU) up to +13.7% YTD in a sea of mo bro red yesterday, those who are long of US domestic consumption growth (from an investment style factoring perspective) have been incarcerated by beta again. After dropping -4% this week, the Russell 2000 is down YTD. Not a bull market.


In all seriousness, I should probably have Christian Drake write the Early Looks for the rest of the year, because I’m running out of both Fed jokes and investment ideas. If I couldn’t get you to buy Gold Bond on any of its down days for the last 6 months, I’m probably not going to get you to buy it this morning.


Actually, you shouldn’t buy Gold or Bonds or anything equities that looks like a slow-growth #YieldChasing bond this morning anyway. On a relative basis to both beta (Russell 2000) and volatility (front month-VIX), the Gold Bond trade is as immediate-term TRADE overbought as the VIX is.


To review this week’s slammer move:


  1. VIX crashed to the upside (+24% in a straight line) after holding a line (10) that it’s never held below, sustainably
  2. Russell 2000 backed off like Brazilian ballers from its all-time-bubble-high of 1208 (March 4th, 2014)
  3. Gold broke out above our long-term TAIL risk line of $1324 (intermediate-term TREND support = $1272)
  4. Bond Yields resumed their bearish TAIL risk (for a US growth breakdown) after failing at 2.81% TREND resistance
  5. US Consumer (XLY) stocks moved back to flat YTD; Financials (XLF) and Industrials (XLI) broke my TRADE support lines


Sure, away from US momentum stocks getting put back in jail on Mon-Tue (i.e. the days Portugal wasn’t the latest weather excuse) there were some other things going on in the world. Japan, which has incarcerated its people with centrally-planned stagflation, was down every day this week.


But this sounds way too bearish for a man in a room who wants you to be right bullish on the bearishness of it all. Remember, if I am right, and US growth slows from Q2 throughout Q3, there is a ton to do on the long side:


  1. Buy Fixed Income
  2. Buy Foreign Currencies vs Burning Bucks
  3. Buy #InflationAccelerating via Gold, Oil, Energy Stocks, etc.


Heck, you can even probably think about buying Malaysian Equities (EWM) at this point! (*Emerging Markets do wonderfully when America is burning its currency credibility at the global stake – see 2011 for details)


Instead of putting me in commission jail (we don’t have a trading desk) for being bullish on bearishness, let me cherry pick some good news for you this morning instead of poking Portugal (pathetic bounce for the Portuguese PSI 20 this morning btw, still bearish TREND @Hedgeye):


  1. Malaysia was the 1st country in Southeast Asia to RAISE rates in 2014
  2. Malaysia hasn’t raised rates for their hard working Savers in 3yrs, so this is #cool for consumers
  3. Malaysia’s stock market only pulled back 0.5% on that, which looks like a buying opportunity


Newsflash to the US politicians who have incarcerated your savings and paid themselves in size with your tax dollars: when a country has the spine to raise rates, it gets ole school Ben Franklin frugality savers paid. And when we Can-Am ole school guys get paid on our savings, we can do crazy stuff like invest, hire, etc.


Yep. If you want me to get downright bearish on Gold, Bonds, etc. like I was last year – get your unelected gravity bending agency to raise rates. Dollar Up, Rates Up, Hiring Up, Capex Up – 1980s and 1990s style America. Who wouldn’t invest in that?


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.49-2.59%


RUT 1155-1173

BSE Sensex 25034-26170

VIX 10.32-12.67

Pound 1.70-1.72

WTI Crude 101.76-104.31

Gold 1


Best of luck out there today – and go #Argentina!



Keith R. McCullough
Chief Executive Officer


Incarcerating Investors - Chart of the Day


TODAY’S S&P 500 SET-UP – July 11, 2014

As we look at today's setup for the S&P 500, the range is 32 points or 0.59% downside to 1953 and 1.03% upside to 1985.                                           













  • YIELD CURVE: 2.08 from 2.08
  • VIX closed at 12.59 1 day percent change of 8.07%


MACRO DATA POINTS (Bloomberg Estimates):

  • 1pm: Baker Hughes rig count
  • 2:00pm: Monthly Budget Stmt, June, est. $79.0b



    • House will vote on H.R. 4718, legislation to make bonus depreciation permanent; White House said it would veto the bill
    • Commerce Dept releases final decision on anti-dumping, countervailing duties on oil country tubular goods from 9 countries including Korea
    • U.S. ELECTION WRAP: Poll Accuracy; Attack Ads; Fundraising



  • Reynolds said near deal to buy Lorillard with BAT blessing
  • Whirlpool to buy $1b Indesit stake in European expansion
  • AbbVie said to nudge top Shire investors to urge deal talks
  • Farnborough air show to focus on existing models
  • Espirito Santo discloses EU1.2b exposure to GES
  • Alibaba nears SEC assent as biggest IPO causes few U.S. ripples
  • Gap falls after posting unexpected drop in June comp sales
  • Caesars said to tap Kirkland & Ellis to lead restructuring talks
  • Nowotny says no ECB action needed now as stimulus takes hold
  • Oil demand seen by IEA rising fastest since ’10 on China growth
  • July WASDE for corn, soybean, cotton, wheat released at noon
  • SoundCloud music service said to near deals with record labels
  • Apple bid for Samsung U.S. sales ban pitched as more modest
  • China, U.S. highlight steps on yuan, investment pact post talks
  • VW outsells GM in China to remain on track for repeat sales win
  • Google to send executives to Europe to discuss privacy: NYT
  • German, French business lobbies criticize U.S. bank fines: FAZ
  • Yellen Testimony, China GDP, GM, JPMorgan: Wk Ahead July 12-19



    • Fastenal (FAST) 6:50am, $0.44 - Preview
    • Wells Fargo (WFC) 8am, $1.01 - Preview



  • CME/Thomson Reuters to Run Replacement for Silver Fix in August
  • Grain Prices Seen Falling in OECD-FAO Outlook as Supply Rises
  • Palm Oil Imports by India Sliding as Buyers Like Sunflowers
  • Milk Output Gain Poised to Spur 5-Year Global Glut: Commodities
  • WTI Set for Third Weekly Drop as Supply Risks Ease; Brent Falls
  • Sugar Output in India to Rise First Time in Three Years on Yield
  • MORE: Shanghai Exchange Copper Inventory Rises to 5-Week High
  • Record U.S. Soybean Crop Spurs Storage Crunch as Prices Drop
  • Tin Losing to Nickel as Indonesia Calls Shots: Chart of the Day
  • Prepare for Oil to Keep Falling on Libya to U.S. Supply: Energy
  • Gold Heads for Longest Weekly Rally Since March on Haven Demand
  • Rapeseed Prices Seen Extending Decline on Ample European Supply
  • Gold Traders Resume Bullish Outlook as Haven Demand Increases
  • Pollution Permits to Gain 28% as EU Cuts Glut: Carbon & Climate


























The Hedgeye Macro Team
















July 11, 2014

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Early Look

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Poll of the Day Recap: 77% Bullish on Gold Through 2014

Gold futures jumped sharply today to their highest settlement in nearly four months amid a pullback in U.S. stocks. Gold for August delivery climbed $14.90, or 1.1%, to settle at $1,339.20 an ounce on the Comex division of the New York Mercantile Exchange. The most-active contract hasn’t settled this high since March 19.


Gold is up over 10% YTD and is on Hedgeye’s Investing Ideas via GLD.


When growth surprises to the downside, and a run-up in prices for everyday necessities people actually consume increases, individuals obviously have less money to spend. Accordingly, Gold’s breakaway from the broader commodity complex and stronger linkage to the dollar and forward looking monetary policy makes intuitive sense.


In today’s poll we asked: Are you bullish or bearish on Gold through 2014?


77% of respondents voted they are BULLISH on Gold, while 23% voted BEARISH.


In the one-minute video below, macro analyst Ben Ryan briefly discusses some of the reasons we became bullish on Gold and added it to Investing Ideas.



As one respondent commented, “Jim Rickards' snowpack grows every day. Avalanche not an if but a when. “


More to be revealed.


Potbelly: Staying Short $PBPB

Takeaway: Hedgeye's Howard Penney is staying short PBPB.

Editor's note: This is a brief excerpt taken from a research report released earlier this afternoon by Restaurants sector head Howard Penney.


We added PBPB to the Hedgeye Best Ideas list on 11/19/2013 at $28.15/share.  Since this time, 2014 EPS estimates have been revised down from $0.39 to $0.18 and the stock has acted accordingly (down ~60%).  We remain short PBPB and continue to have concerns with the company’s aggressive growth strategy, particularly in the face of fundamentals that suggest the chain shouldn’t be growing at all.


Potbelly: Staying Short $PBPB - pbpb


Potbelly preannounced disappointing 2Q14 results yesterday, including revenues of $83.6m ($86.7m est.) and adjusted EPS of $0.06 ($0.12m est.).  In addition, same-store sales declined -1.6%, 240 bps below consensus estimates, and traffic declined for a sixth consecutive quarter.  Management guided down full-year adjusted EPS to the $0.18-$0.21 range ($0.34 est.) and full-year same-store sales to flat to negative low-single digits (+0.8% est.). 


Back in November, when we made our original short call, we wrote:


“At the heart of it, Potbelly is a single daypart, low margin, low return sub shop with declining traffic and little competitive advantage over its most basic competitors.”


Though this seemed harsh at the time, the company’s results as a public company have given us little reason to retract these words.


Takeaway: The FY15 budget and out-year fiscal policy guidance are in line with the structural GIP improvement we’ve been calling for; buy the dip(s).

Newsflash to all Keynesians, monetarists, neo-monetarists and any other Ivory Tower economics gangs that I’m not yet familiar with: you don’t have to burn your currency at the stake for “exports” in order to generate economic and financial market prosperity (you actually can’t – at least not on a sustainable basis).


If you haven’t yet learned anything from the 2013-14 UK experience, you’re getting another opportunity to witness what sound monetary and fiscal policy can do for a country in present-day India. Specifically in the UK, real GDP growth accelerated +280bps or +1400% to +3% YoY from EOY ’12 through 1Q14; the FTSE All-Shares Index appreciated +15.2% in conjunction with a +5.3% appreciation in the GBP/USD exchange rate on David Cameron’s austerity and Mark Carney’s regime change at the BOE.


Looking to India, today new finance minister Arun Jaitley introduced the FY15 budget and out-year fiscal policy guidance and both were in line with recent, irrational fears of fiscal consolidation. Specifically, Modi’s new finance chief is maintaining the existing target of 4.1% for the FY15 deficit/GDP ratio – a seven year low – while pledging to reduce that ratio to 3.6% in FY16 and 3% in FY17.


Underneath the hood, both the guidance and commentary were quite hawkish as well:


  • “We can’t spend beyond our needs. We can’t leave debt and liability behind for our future generation.” – Arun Jaitley
  • “We are committed to providing a stable and predictable tax regime which will be investor friendly and spur growth,” said Jaitley. He also stated that he’d decide on a much-needed goods and services tax (GST) by year’s end. That, coupled with his pledge to limit retroactive tax demands on businesses, should actually help increase the nation’s tax take, at the margins, by promoting marginal capital formation and FDI. With respect to promoting the latter, we’re pleased to see that he lifted the FDI limits for the defense and insurance sectors to 49% from 26% currently.
  • Much to the chagrin of gold bulls, Jaitley also left import taxes on gold unchanged after hiking them from 2% to 10% over the past two years, while also mandating that 20% of imports be re-exported. The associated restrictions on gold imports help slash India’s current account deficit by more than half to $32B last fiscal year. The government is expecting a further decline in gold purchases in FY15 to 650 metric tons from 847 metric tons in FY14.
  • Perhaps most importantly, Jaitley also stated that the India’s new fiscal policy roadmap is “only the beginning of a journey” towards reviving India’s downtrodden economy (e.g. India’s latest real GDP growth rate of +4.6% YoY is in the bottom decile of all readings over the trailing ten years). He cautioned investors that it would be “several years” before growth would get back up to the 7-8% figures India had been putting up consistently.


The latter catalyst is a clear signal that the Modi regime is “in it to win it” for the long haul, opting to put the economy on a sustainable growth path rather than trying to jump-start the ailing economy in an inflationary manner – something we’d expect any long-term investor worth his/her shirt to adore. This is in stark contrast to the tactics of the previous administration led by the Monmohan Singh of the Congress Party.


While it will be somewhat difficult for India to meet the FY15 budget guidance given that 46% of the deficit target has been achieved through only the first two months of the fiscal year, we like that Jaitley is not relying on overly-optimistic growth forecasts to get the job done. In fact, he openly criticized the previous finance minister, Panaliappan Chidambaram for assuming pollyannaish revenue growth amid aggressive GDP growth forecasts, while consistently understating and deferring subsidy expenditures, which have grown fivefold over the past 10Y and now account for 16% of total expenditures.


All told, this the kind of structural improvement in India’s GIP fundamentals we’ve been calling for since last OCT and is in line with what Dr. Rajan has been promoting as governor of the RBI. On that front, “Dr. Raj” was out this morning reiterating his EOY ’14 CPI target and his previous guidance that controlling inflation is paramount for Indian growth and that the RBI and new administration are working in conjunction on that task.


Click on the following hyperlinks to review the aforementioned thesis, which was out in front of a +31.4% gain in the WisdomTree India Earnings Fund ETF (EPI) since then. That performance compares to a sample mean of only +3.4% across the 24 country level ETFs we track in the EM space. #Alpha:



As such, we’d expect continued improvement in India’s budget balance and current account balance over the intermediate-to-long term.






Both would be positive for the Indian rupee (and Indian growth via current account financing) – which our FX valuation models see as roughly 6-16% undervalued at current prices.






In five years of writing research notes on India’s budget, this is the first one that has a takeaway that isn’t extremely negative; in fact, it’s overwhelmingly positive. India’s new “management team” is flat-out killing it. We’ve said this before and we’ll say it again: if we could LBO entire countries, India would be our primary acquisition target!


Feel free to ping us with any questions, comments or concerns.






Darius Dale

Associate: Macro Team