Takeaway: The Fed is (still) the problem.
So, Bernanke spoke at the Keynesian Central Planning Club of Washington D.C. yesterday...
He basically did more of what we’ve come to expect from him (no December taper... Change the goal posts on tapering targets etc). Surprise, surprise. The Dollar is down again this morning (FYI - it's down -1% on the US Dollar Index since Yellen spoke last week.)
Bernanke thinks the “surest path to economic recovery” is to do more.
He’s sure about that.
That’s the problem.
Incidentally, after failing right at its $81.39 Hedgeye TREND line on “Yellen Day,” it will be interesting to see if the USD can bounce to another lower-high from here. I think those buying dollars in hopes of a December taper are going to be as wrong as those who bought into the idea that “Yellen will be more hawkish than you think."
She’s the Mother of all Doves. Deal with it.
(Editor's note: This is an excerpt from Hedgye morning research. To learn more about our products click here.)
Client Talking Points
So Ben Bernanke spoke at the Keynesian Central Planning Club of Washington D.C. yesterday. He basically did more of what we have come to expect from him (no December taper... Change the goal posts on tapering targets). Surprise, surprise. The Dollar is down again this morning (FYI - it's down -1% on the US Dollar Index since Yellen spoke last week.) Bernanke thinks the “surest path to economic recovery” is to do more. He’s sure about that. And that’s the problem.
After failing right at its $81.39 Hedgeye TREND line on Yellen Day, it will be interesting to see if the USD can bounce to another lower-high from here. I think those buying dollars in hopes of a December taper are going to be as wrong as those who bought into the idea that “Yellen will be more hawkish than you think." She’s the Mother of all Doves. Deal with it.
Oil has completely lost its USD correlation (for now). Our TAIL risk line of $108.69 on Brent remains resistance. We’re short Oil and looking for $103.68 Brent next. Russian stocks lead the losers on weak oil this morning. The RTSI is down -1.3% and back down to -2.1% year-to-date.
|FIXED INCOME||6%||INTL CURRENCIES||22%|
Top Long Ideas
Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged. If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Three for the Road
QUOTE OF THE DAY
I haven't celebrated coming in No. 2 too many times.
STAT OF THE DAY
J.C. Penney reported a larger-than-expected quarterly loss this morning, but the ailing retailer said there will be continued improvement in sales during the current quarter. Shares of J.C. Penney jumped more than 9% ahead of the opening bell.
“Unlike an inexorable, Newtonian “great machine”, the economy is not a closed system.”
That’s a quote from the end of lucky chapter 13 of one of the best markets/economics books of 2013, Knowledge and Power, by George Gilder. I like this book because it’s the precise opposite of what your central planning overlords @FederalReserve think.
Yesterday, at the Keynesian-economics-Club-of-Washington-D.C. event, Ben Bernanke proclaimed his mystery of faith to his head nodders: “the surest path to recovery” is for the Fed to do more (read: no taper).
Right, right. It’s a good thing he’s sure.
Back to the Global Macro Grind…
This, of course, is the basic divide between how most of us market-practitioners think about markets/economies versus some un-elected and unaccountable academic theorist does. Core to Fed group-think is certainty whereas what we do is embrace uncertainty.
Markets and economies aren’t some theoretical “great machine” that behaves in “equilibrium.” Markets and economies are dynamic and non-linear. Anyone who has studied history understands that.
I’ve been on the road seeing clients in Los Angeles and San Francisco this week. I’ll be in Vegas tonight and Phoenix tomorrow. No matter where I go, I get the same feedback from market-practitioners about Fed policy – uncertainty.
At the same time, these dudes (and dudettes) backslapping one another at the Fed think that they have this completely under control. At one point yesterday, Bernanke said that his “forward rate guidance is helping the economy.”
Taper, no-taper, taper, no taper, maybe-taper, no taper, change goal posts on taper, don’t taper…
It’s a certified circus at this point.
The smartest investors I meet with have the humility to tell people that they have no idea how this ends. So that’s comforting, right? Not only one of the sharpest clients we have, but one of the best performers in 2013 YTD, summarized that this he-said-she-said-taper-talk thing has given him a tremendous amount of conviction in one position – cash.
“Keith, with all of the illiquidity and policy risk factors building out there, I really like cash.”
After effectively day-trading Yellen’s predictable behavior last week, I’ve gone from 48% cash in the Hedgeye Asset Allocation Model to 60% this morning. But I was at 66% cash yesterday morning, and bought-the-damn-bubble in a few things on red again yesterday.
Day-trading? Yep. I have no problem with that. Do you? #GetActive
I realize its below these uber intellectual types at the “Economics Club of Washington” to risk manage (read: trade) the market risk they are superimposing on us every day. And I kind of like that. Maybe they’ll label me a lower-class-trader, or something like that.
What’s my call? It’s been a fantastic year to be long US #GrowthAccelerating (from 0.14% GDP with the SP500 at 1360 in Q412 to 2.84% GDP Q313 and US stocks at all-time highs), and now, on up days, it’s time to raise cash.
Looking at both real-time market indicators (Russell2000 growth has been making lower highs since locking in its all-time high on October 29th) and high-frequency economic data, it appears to us that the slope of the line on US growth is peaking.
Since what happens on the margin matters most, if and when the US economy slows (from here) to say 2% (or 1.6%, which is now the downward bound in our GIP model for US GDP Growth in 2014), what do you think the top performing Style Factor in US Equities (GROWTH) is going to do?
No worries, you don’t have to guess – that style factor is already starting to do what you should expect it to do – slow. As US equity market momentum slows (on lower and lower volumes), both the Fed and its nodders are going to get lulled to sleep.
Moreover, I think the Fed will cheer on the #GrowthSlowing data as more reason not to taper… and, in doing so, they’ll suck in every last lemming who hasn’t been long US stocks in 2013 to buy the bubble.
How messed up is that? I have no idea on timing, but oh how this “great machine” of Keynesian certainty is going to fall.
Our immediate-term Risk Ranges are now as follows:
UST 10yr Yield 2.67-2.81%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
(Editor's note: This JCP summation comes from Hedgeye Retail Sector Head Brian McGough. The stock is up over 5% in pre-market trading.)
As expected, there’s good and bad in the JCP quarter, but the net read is positive. What we were looking for was improvement in both the P&L and the balance sheet, and we got ‘em both.
1) The bad, Gross margins were down 300 basis points in the quarter, as JCP cleared away inventory overhand from 1H and stepped up its promotional cadence.
2) The good news is that promos worked, and sales improved sequentially throughout the quarter. Dot.com sales were up 24.5%.
3) EPS of ($1.81) missed the Street’s ($1.70) but the reported number includes a $0.73 loss associated with a tax valuation allowance.
4) JCP voluntarily repaid $200mm on its revolver. That’s not behavior one would expect from a company about to file Chapter 11.
5) Guidance for 4Q includes; 1) additional sequential improvement in top line and gross margin – and both positive vs last year, 2) DOWN sg&a versus last year, and liquidity to be in excess of $2bn.
6) That final point on liquidity is the most important. The big bears out there had estimates for year-end liquidity of $1.5bn to $1.8bn. Again, companies with stocks going to zero don’t take up liquidity estimates.
7) Our bet is that a third of sell side noted share the same title today ‘turning a corner’. This will be the quarter people will point to in hindsight as evidence that JCP is actually a viable company.
FLASHBACK: Here was McGough's take last week ahead of the report.
get free cartoon of the day!
Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox
By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.