Hedgeye CEO Keith McCullough explains what he's thinking and doing on this morning's macro conference call and why Simon "Chartreuse" Potter at the NY Fed is a piece of work.
Client Talking Points
After another blockbuster economic data point out of the UK this morning (November Construction PMI 62.6! vs 59.3 in October), the Pound continues to pound the Burning Buck at $1.64 versus the US Dollar. Guess what? It can go a lot higher from here. Especially if the Fed engages in open-market storytelling about why the ISM growth data (best in 3 years) isn’t enough to taper. Unbelievable.
Rates down means Gold up this morning (following rates up and Gold getting slammed yesterday). ‘Tis the season and the end of a fantastic year of being long growth and short the anti-christ of it (Gold). Capitulation in Gold should happen as US growth expectations lock in 1-year highs. Thursday’s US GDP print for Q313 should be the top in growth, sequentially.
Mother Russia remains in a body bag this morning. She's leading the European Equity decline (as it has all year). The RTSI is down -1.9% to -6.1% year-to-date. Now all we need is for Brent Oil to snap its TAIL risk line of $108.69 again. If that happens, Vladimir Putin will have more issues than the Ukraine. That's saying something.
|FIXED INCOME||4%||INTL CURRENCIES||26%|
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
TWEET OF THE DAY
The "January Effect" gets priced in in December with 9 of the 13 Decembers since 2000 being +1% for the S&P @hedgeyeJC
QUOTE OF THE DAY
"It's hard to beat a person who never gives up." -Babe Ruth
STAT OF THE DAY
Sony's PlayStation 4 may be turning into the hit the company needs. Global sales of the game console topped 2.1 million as of Dec.1, just two weeks after it was launched in the U.S. and Canada and three days after it was made available in other markets.
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THE MACAU METRO MONITOR, DECEMBER 3, 2013
HONG KONG CONFIRMS 1ST HUMAN H7N9 BIRD FLU CASE WSJ
Hong Kong is on public-health alert after the city confirmed its first human case of the deadly H7N9 bird flu, with an Indonesian domestic worker hospitalized in critical condition. Health secretary Ko Wing-man said the government has raised its influenza pandemic response level to "serious" from "alert." The number of human H7N9 infections in China has dropped significantly in recent months. As of early November, there were 139 confirmed human cases of H7N9 and 45 deaths reported since April, according to the WHO.
“We had invested very heavily over a very long period of time in the education of quality leaders.”
John Allison retired in 2010 after building one of the best banks in US history. “BB&T made it through the sub-prime crisis without a single quarterly loss… In Allison’s 19 years as CEO, BB&T grew from a statewide bank… to a $152B bank operating in 11 southern states and the District of Columbia.”
“We had really strong presidents … they had a much higher level of authority than our competitors… they were held responsible – they owned the process.” –Allison (Knowledge and Power, pg 172)
Sounds like our central bank, right? Ha! Especially the crony boys from mediocre-land (downtown at the New York Federal Reserve Bank). That’s where you’ll find below-average-at-best Bill Dudley and his whipping boy Simon Potter. These guys aren’t leaders. They are academic group-thinkers. And one day, all of their conflicted “smoothing” decisions will come home to roost. Mark my tweets.
Back to the Global Macro Grind…
If you want to get into the holiday anti-Fed mood, pick up a copy of the book John Allison published this year – The Financial Crisis and the Free Market Cure. It contains 0% of the Fed-access-propaganda you see paraded around with CNBC’s Keynesian peacocks every day. They are real thoughts from a real-time risk manager of banking and non-linear market risk.
“In my career, the Fed has a 100% error rate in predicting and reacting to important economic turns… because it is trying to arbitrarily set the single most important price of the economy – the price of money… setting wage and price controls from the time of Diocletian to Nixon, has proven in every case a disaster for economies and the people entrapped by them.” (Knowledge and Power, pg 175)
In other news this morning, after stuffing the New York financial media with crab cakes and vino last night, the Fed’s anti-dog-eat-dog-price-controller-of gravity, currency, and rates (Simon Potter) proclaimed his mystery of faith that “operationally, market participants generally characterize the exercise as smooth, with minimal disruptions.”
Potter, of course, is talking about what Thomas Jefferson surely had in mind - a reverse-repo-facility from the Fed that will look over Americans while they sleep. Chartreuse for everyone in NYC. This is the new America we all believe in, baby! (I’ll have a Bud Light pls)
Meanwhile, US stocks are pinned by a vacuum of Fed stimulated performance chasing all-time bubble highs, on no volume, and rising implied volatility signals.
By “minimal disruptions” what the NY Fed means is that @PIMCO doesn’t have to worry about economic information surprises being market-to-market on the long-end of the yield curve.
As evidenced by June and August spikes in US #RatesRising, there is nothing “smooth” about US currency and/or rate markets trading freely anymore. Oh, and The Fed needs to find a way to get people out of an MBS market bubble that doesn’t trade, don’t forget.
That’s why yesterday’s story within Mr. Macro Market’s score was so revealing. Follow the bouncing ball of events in the order that they appeared:
- 10:00 AM – ISM of 57.3 for NOV surprised on the upside (driven by New Orders of 63.6 and Employment at a fresh YTD high)
- 10:14 AM – US stocks put in their low of the day as the market got briefly confused about great news being bad re Fed-taper
- 12:30 PM – SP500 stops going up at an all-time high of 1810 as #RatesRising push higher, Gold lower
4:00PM EST – US stocks close on their lows of the day; US Equity Volatility (VIX) closes at the high of the day
In other words, to John Allison’s point, the Fed continues to look silly whenever it hinges policy on its forecasts. Its 2013 forecast on US consumption and employment growth were dead wrong. So now the Fed is behind the curve, making stuff up, in a Sisyphean fight for its academic dogma.
We’re going to get a 3% handle on US GDP this week (Thursday) and all the Fed’s open-market-storytelling communications will be able to do is make up more reasons why you should think this is still 2008. Fear, forever.
And guess what – if you let them, they might just perpetuate their own reality this time. The next crisis is going to be a central planning one. America hasn’t invested in Paul Volcker type leadership at the Fed. We are hostage to un-elected NYC banking group-thinkers.
10yr Yield 2.71-2.81%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer