Takeaway: Net/net, we'll take it, even if the U.S. Government is this country’s lowest margin customer.
- "Under a provision of 1941 legislation known as the Berry Amendment, the Defense Department must buy boots, uniforms and certain other items that are 100% U.S.-made. It can make exceptions if U.S. manufacturers don't have the capacity to make what it needs, and has done so for athletic shoes needed for boot camp."
- "But now, under pressure from the domestic shoe industry and lawmakers, particularly those from Massachusetts, Maine and Michigan that have some of the country's few remaining shoe plants, the military is going to review its exemption for U.S.-made sneakers."
- "New Balance Athletic Shoe Inc. and Wolverine Worldwide Inc. both say they could provide 100% U.S.-made athletic footwear for the military. Others expressing interest include Capps Shoe Co., a maker of military shoes, and two producers of military boots: Wellco Enterprises Inc. and the Danner unit of LaCrosse Footwear Inc."
Takeaway from Hedgeye’s Brian McGough:
While this is good on the margin for Wolverine Worldwide (WWW), the reality is that the lowest margin customer in the country is…
The US Government -- unless you're supplying rockets and other things that explode (and even then, margins are questionable).
But hey, the orders tend to be steady, and they always pay on time.
Net/net, we'll take it.
Join the Hedgeye Revolution.
This note was originally published March 06, 2014 at 08:08 in Morning Newsletter
“What’s in a name? That which we call a rose by any other name would smell as sweet.” -William Shakespeare
The big picture
What’s in a bubble?
I’ve been channeling my inner 1999 for the last 3-days in California. I’ve done Los Angeles, San Diego, and San Francisco. And while it would be cute to tell you that I can actually smell a bubble, these types of things don’t have a particular scent.
At the all-time highs, they just look sweet.
All-time highs? Yep. It’s not just Yelp (YELP) and Facebook (FB). It’s Barney Frank’s American Housing dream. The all-time highs in the largest component of American cost of living are here. It’s called rent.
Oh, you don’t rent? Ok, you’re like me then. You’re big time – you own. But don’t confuse the 20% of us who are long asset price inflation with the rest of them (80% of Americans) who get pulverized by Policies to Inflate. The cost to live in this country has never been bubblier.
What’s in the cost of living?
Unless you’re like the “folks” in Washington who take car service to work, you have to put gas in the transportation thing too. And if you can’t afford a car, you can always save some money and take the bus, or walk…
What’s in the all-time high in American “inequality”?
- The Housing Bubble
- The Commodity Bubble
- The Bond Bubble
One by one, central planners at the Fed blow these bubbles up so big that, like Jim Carey in The Truman Show, we start to live inside them. There’s an effervescence to that, I guess.
Or at least that’s what Oaktree’s Howard Marks said in our back to back presentations at the CFA Society’s Annual Forecast Dinner in San Diego on Monday night. He called the cov-light-pik-toggle-bond thing being “back” – an “effervescent bubble.”
As we went back and forth in the Q&A part of the event, Marks made an astute observation about real-world life. The average American has $20,000 in post tax income, but spends approximately $22,000 a year.
So, if you ramp up the Top 3 things Americans have to pay for (if they don’t pay for their kids to go to school), the Bush/Obama/Bernanke/Yellen Policy to Inflate should drive cost of living up to say $25,000-30,000/year. That’s why the US Savings (as a % of disposable income) is retracing its 2008 crisis lows. Like their government, Americans once again have to borrow to spend.
In other news, inflation slowed US consumption growth again in February:
- USA’s ISM Services report for FEB (reported yesterday) slowed to its lowest level since FEB of 2010
- The Employment component of the ISM Services Series dropped < 50 (largest m/m drop since NOV 2008)
- US Services PMI (Markit data series) slowed from 56.7 in JAN to 53.3 in FEB
No worries though, it’s all “weather.”
If you want to join the Federal Reserve and believe that (and tell the 80% that inflation doesn’t slow growth), you can start turning on the Weather Channel and buying the all-time highs in social media every day they forecast yesterday’s sunny news.
I’ll be selling stocks (and buying Commodities, Bonds, and Foreign Currencies) into that. Because, like in Q1 of 2011, Down Dollar and Down Rates were signaling a US consumption growth slowdown inasmuch as they did in Q1 of 2008.
As for retracing my California travels of 1999, Q1 of 2000 wasn’t exactly the time to be wearing rose colored glasses either.
- CASH: 31%
- US EQUITIES: 3%
- INTL EQUITIES: 10%
- COMMODITIES: 16%
- FIXED INCOME: 20%
- INTL CURRENCIES: 20%
Our immediate-term Macro Risk Ranges are now:
UST 10yr Yield 2.59-2.75%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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As expected, this morning the ECB announced no change to its main interest rates.
ECB President Mario Draghi reiterated much of the same policy stance and outlook since his December meeting of last year. The EUR/USD rallied throughout the conference.
Draghi again stressed that the Eurozone may experience a “prolonged period of low inflation”, that the Bank would maintain accommodative monetary policy for “as long as is necessary”, and to expect that key rates would remain “at present or lower levels for an extended period of time.”
What was not spoken? Draghi did not include measures to suspend sterilization of the SMP, leaving it as an instrument for future consideration. He also spoke of no concrete plans to free up credit to the “real” economy (SMEs in particular). Draghi gave the following reasons on why the ECB took no action today:
- Baseline forecast confirmed, with modest economic recovery
- News out since last meeting, by in large on the positive side
- PMI data is strongest in 2.5 years
- PMI services a huge component of job in the region, very positive
- Metric gaps between Germany and Spain &Italy narrowing
- Unemployment high, but stabilized
Updated Staff Projections for March versus December moved ever so slightly on the 2014 outlook, boosting GDP 10bps higher, and inflation 10bps lower:
GDP Staff Projections: 1.2% in 2014 (+10bps vs DEC); 1.5% in 2015; 1.8% in 2016
CPI Staff Projections: 1.0% in 2014 (-10bps vs DEC); 1.3% in 2015, 1.5% in 2016
Other Key Takeaways from Draghi:
- Eurozone government deficit is expected to have declined to 3.2% of GDP in 2013 and is projected to be reduced to 2.7% of GDP in 2014
- Eurozone government debt is projected to peak at 93.5% of GDP in 2014
- Emerging Market impact on Eurozone has so far been muted. In fact there have been flows into Europe that have helped to narrow the spreads between countries
- On Ukraine: Draghi said he does not suggest strong contagion. But geopolitical risks could become substantial and generate significant consequences. The Bank has not assessed scenarios.
- On the Eurozone slipping into Japan-like Deflation: Draghi said ECB has taken early and decisive action on monetary policy to prevent anything like Japan’s situation. He remains confident in the 2% inflation anchor.
- To read a copy of Draghi’s prepared remarks click here.
- We remain marginal European equity bulls of US equities. Our preferred investment in the region is long German and UK equities (EWG and EWU) and long the Pound/USD (FXB) – note that today the BOE also left the main interest rate unchanged (at 0.50%) and maintained the asset purchase target (as expected), which is supportive of our long call. The GBP/USD is up +2.4% in the last month.
- Broadly, we believe Draghi’s continued posture of “ready and willing to act” (to ensure the survival of the Eurozone at any cost and keep financial conditions accommodative) will continue to support the common currency and strengthen investor confidence in the equity market.
- EUR/USD: we expect Yellen to likely pull back on the tapering program to a more dovish position that should weigh on the USD to the downside. See our levels below.
Takeaway: We continue to see a gradual, but steady, deterioration in the rate of improvement in the labor market that began seven weeks ago.
The Labor Market Continues its YTD Cooling Trend
Labor market data continued its deteriorating trend this past week, bringing to almost seven the number of consecutive weeks this has been happening. Notwithstanding a brief studder-step two weeks ago the progression of the labor market data has been progressively negative every week for almost the last two months, or, alternatively, since the start of the year. As a reminder, we look at the year-over-year rate of change in the rolling NSA initial claims. Specifically, we look for inflections in the trendline rate of improvement as the series naturally converges towards zero as the economy reaches full steam. Here are the last seven data points with the most recent data point first: -3.5%, -4.4%, -5.6%, -5.1%, -5.7%, -7.3%, -7.9%, -8.5%. Since we're looking at the rate of change in year-over-year initial jobless claims a more negative number is better as it implies a faster rate of improvement.
To be clear, we're not yet sounding the alarm on the labor market, but it's important to note that the rate of improvement is decelerating steadily and if that trend continues then we could see, in the not too distant future, the labor market reverse course, i.e. claims begin to rise.
Prior to revision, initial jobless claims fell 25k to 323k from 348k WoW, as the prior week's number was revised up by 1k to 349k.
The headline (unrevised) number shows claims were lower by 26k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2k WoW to 336.25k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -3.5% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -4.4%
The 2-10 spread rose 4 basis points WoW to 238 bps. 1Q14TD, the 2-10 spread is averaging 242 bps, which is higher by 1 bps relative to 4Q13.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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