The BS Filter: Fed Following (& Other Nonsense)

Takeaway: Here's our take on some of today's top financial stories.

The BS Filter: Fed Following (& Other Nonsense) - Fed cartoon 01.11.2015


The Fed kicked off an action packed week of central planning with the release of its minutes and the regional Fed presidents trotted out any number of strange narratives. Here are a few.

New York Fed President Bill Dudley (8/18/2016):

"Let's imagine that the third quarter has very very strong productivity growth, accompanied by weak gains in payroll and employment... Well then you probably would not put much weight at all on the strength of GDP. At the end of the day, how the GDP growth translates in terms of employment gains is probably the more important element."


OUR TAKE: So Dudley wants us pay attention to the jobs market. Well, jobs growth put in its year-over-year peak in February 2015. It's been declining ever since.


The BS Filter: Fed Following (& Other Nonsense) - nfp 8 5

St. Louis Fed President James Bullard (8/17/2016):

In a presentation entitled “Normalization: A New Approach” today during the Wealth and Asset Management Research Conference at Washington University in St. Louis, Bullard said rates should remain flat over the next two and a half years. “If there are no major shocks to the economy, this situation could be sustained over a forecasting horizon of two and a half years," he said. "These facts suggest that it may be time to quit using the old narrative.” 



Atlanta Fed President Dennis Lockhart (8/16/2016):

“I’m not locked in to any policy position at this stage, but if my confidence in the economy proves to be justified, I think at least one increase of the policy rate could be appropriate later this year,” Lockhart said. "Early indications of third-quarter GDP growth suggest a rebound. I don't believe momentum has stalled. I remain confident about prospects in the second half of 2016 and 2017."


OUR TAKE: U.S. growth has slowed from 3-2-1%. What makes him so sure growth will accelerate. 

san Francisco Fed President John Williams (8/15/2016):

"There is simply not enough room for central banks to cut interest rates in response to an economic downturn when both natural rates and inflation are very low," Williams said in the latest issue of his regional Fed bank's Economic Letter on Monday. There are “limits to what monetary policy can and indeed, should do... the burden must also fall on fiscal policy do to its part."


OUR TAKE: Williams was calling for up to 5 rate hikes in 2016. Now he says we need fiscal policy because U.S. economic growth is sluggish. Thanks for coming out.

Is Investor Complacency Rising?

Takeaway: US market short-interest has been cut 13% since February and net long positioning is near a multi-year high pointing to investor exuberance.

Editor's Note: Below is a brief excerpt from an institutional research note written by Hedgeye Macro analyst Ben Ryan. For more information about our institutional research contact


Is Investor Complacency Rising? - trust my gut cartoon 10.14.2015  2


We speak of S&P 500 net non-commercial futures and options positioning regularly. Index + e-mini positioning has been cut the last couple of weeks, but it’s still pinned near a multi-year high.


Is Investor Complacency Rising? - sp pos


Along with futures and options positioning, total U.S. market short-interest has been cut 13% since February and the CBOE skew index indicates a market that is positioned much less cautiously than it was in the summer of 2014, at least in volatility terms.

… But, Dude, What About Brazil??

Key Takeaways:


  • There is a strong fundamental case to be made to back up the truck on the long side of Brazil.
  • That being said, however, a slew of policy pitfalls remain.
  • As such, we’d only sign off on getting long Brazil to the extent the Rousseff impeachment process goes as consensus expects it will; we would be buyers of a “sell the news” event in the face of a positive outcome.


In response to this morning’s Early Look in which we detailed our latest thoughts on country-picking in emerging markets, we received a number of replies asking for our thoughts on Brazil, which itself failed to make the cut in our most overvalued/undervalued analysis. Given the level of interest, we thought we’d share our revised outlook for the Brazilian economy and its financial markets more broadly.


It’s easy to recap where we’ve been on Brazil lately: wrong (at least until we closed all of our positions in EM last Tuesday). Specifically, as part of the thematic investment conclusions outlined on slide 94 in our 3/16 presentation titled, “Is This a Generational Buying Opportunity in Emerging Markets?”, we were explicitly negative on LatAm equities and FX, which we expressed through the currency un-hedged SPDR S&P Emerging Latin America ETF (GML). That instrument moved -18.4% against us throughout the course of our bearish bias.


Mitigating this disaster is the fact that we’ve been the axe on the bear side of Brazil since mid-July ’14. Inclusive of its +65.9% YTD return, the iShares MSCI Brazil Capped ETF (EWZ) still declined -30.8% from 7/14/14 through last Tuesday. For reference, the MSCI All-Country World Index declined only -2.6% over that timeframe. I’ll take +2820bps of long-term alpha generation any day.


… But, Dude, What About Brazil?? - 1


With all that baggage and glory now squarely in the rearview mirror, we can now focus on our call on Brazil from here: patience. Specifically, we think it’s best that uninvolved investors remain neutral for now. To the extent an investor is currently involved on the long side, we believe the best course of action is to book gains and look to redeploy capital upon further notice.


In GIP Model terms, Brazil has definitely earned its outperformance in the YTD; in fact, it’s one of the best GIP setups I’ve ever seen (more on this below). Moreover, the confluence of a material rally in commodities and the Rousseff impeachment saga have proven particularly positive for a sharp reversal of what had been pervasively bearish sentiment.


… But, Dude, What About Brazil?? - EM Scatter


… But, Dude, What About Brazil?? - BRAZIL


… But, Dude, What About Brazil?? - Brent Crude Oil vs. EWZ


… But, Dude, What About Brazil?? - CRB Raw Industrials Index vs. EWZ


Supporting Brazil’s sexy GIP Model setup are:


  • Consumer spending growth that appears to be breaking out of its YTD basing pattern from historically depressed levels;
  • Industrial production growth that is accelerating on a sequential and trending basis off of historically depressed levels;
  • Export growth that is accelerating on a trending basis off of historically depressed levels;
  • Composite PMI readings that appear to be breaking out of their YTD basing pattern from historically depressed levels;
  • Consumer and business confidence readings that have each completed full-cycle bearish-to-bullish reversals… both are now accelerating on a sequential and trending basis off of historically depressed levels;
  • Headline and core inflation readings that have each completed full-cycle bullish-to-bearish reversals… both are now decelerating on a sequential and trending basis off of historically elevated levels;
  • A currency that is down -25% on a REER basis, which goes a long way towards mitigating the “Dutch Disease” we highlighted several years ago;
  • A current account deficit that has improved +190bps off of its 1Q15 cycle-trough of -4.4% through 1Q16; and
  • An improving primary deficit picture per the latest monthly data… (R$10.1B) in JUN vs. a Bloomberg consensus estimate of (R$15.3B).


… But, Dude, What About Brazil?? - HOUSEHOLD CONSUMPTION


… But, Dude, What About Brazil?? - INDUSTRIAL PRODUCTION


… But, Dude, What About Brazil?? - EXPORTS


… But, Dude, What About Brazil?? - COMPOSITE PMI


… But, Dude, What About Brazil?? - CONSUMER CONFIDENCE


… But, Dude, What About Brazil?? - BUSINESS CONFIDENCE


… But, Dude, What About Brazil?? - CPI


… But, Dude, What About Brazil?? - CORE CPI




… But, Dude, What About Brazil?? - REER




But are Brazilian financial markets priced to perfection? No one knows the answer to that, but my inclination is to side with the “yes” camp. I do know one thing’s for sure, however: I don’t bet on “open-the-envelope risk”, which is effectively what you’d have to do to put a positon on today given the uncertainty surrounding the outcome of Rousseff’s impeachment trial (which will be held across four sessions spanning AUG 25-26 and AUG 29-30). A two-thirds majority (i.e. 54 out of 81 senators) is needed to fully remove her from office, which would allow interim president Michel Temer to remain in power through 2018.


Indeed, the confluence of the market-friendly leadership style of Temer, the bold fiscal reform drive of his acting finance minister Henrique Meirelles and the steady hand of CBR governor Ilan Goldfajn has been a boon to Brazilian capital and currency markets in the YTD. Key reform initiatives include:


  • Narrowing the primary deficit to (R$139B) in 2017 from a projected [record] (R$170.5B) in 2016;
  • Capping the growth rate of public expenditures to CPI;
  • Implementing a broad-based freeze on tax hikes; and
  • Changing the structure of the Finance and Planning ministries in order to put the offices responsible for budget planning, government spending and tax collection all under the purview of Meirelles.


The major issue we see with each of these reforms is that Rousseff’s Workers Party (PT) may not acquiesce to the fiscal reform demands of Temer, who hails from the Brazilian Democratic Movement Party (PMDB). Recall that her own fiscal reform drive fizzled out amid PT infighting over what were widely viewed as draconian fiscal consolidation measures despite near-peak sovereign indebtedness and a slew of ratings downgrades.


… But, Dude, What About Brazil?? - DEBT TO GDP


Moreover, the tax hike freeze isn’t set to be decided upon until the end of this month; a failure to implement the proposed changes would go a long way towards resetting Brazil’s economic recovery expectations structurally lower given its existing status as one of the world’s most over-taxed economies; the World Economic Forum’s 2016 Doing Business Report ranks Brazil’s tax efficiency 178th out of 189 countries.


… But, Dude, What About Brazil?? - Brazil WEF DBR 2016

Source: World Economic Forum 2016 Doing Business Report


All told, there is a strong fundamental case to be made to back up the truck on the long side of Brazil. That being said, however, a slew of policy pitfalls remain. As such, we’d only sign off on getting long Brazil to the extent the Rousseff impeachment process goes as consensus expects it will; we would be buyers of a “sell the news” event in the face of a positive outcome.


Best of luck out there,




Darius Dale


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Is The Healthcare Bubble About To Burst?

In this brief excerpt from The Macro Show, Hedgeye CEO Keith McCullough and Demography Sector Head Neil Howe respond to a subscriber’s question about whether the healthcare sector is a bubble that’s about to pop.


TGT/WMT | Backyard Brawl

Takeaway: WMT investing as TGT sits on the sidelines. Competitive dynamics continue to intensify, TGT the clear loser.

This evolving TGT/WMT relationship has all the makings of a backyard brawl. The only problem is…it’s not a fair fight. Don’t get us wrong – it could be, but as highlighted in our note following the TGT print (full note: TGT | Losing at Defense), we think the management team at Target is playing defense – badly. Think the ‘rope-a-dope’ without the Ali endurance or uppercut. That’s at the same time that the competitive dynamics around the retailer are evolving faster than at any point we can remember in large-cap retail.


In one corner you have AMZN scooping up 25% of the incremental dollars up for grabs in US retail – that’s 2x the rate we saw at the same time in 2015. In another corner is WMT, who saw a meaningful traffic inflection starting in 1Q14 and has been able to hold the upward trajectory for 2+ years as it invests its way to a flat earnings CAGR over the next 4 years. And in the 3rd corner there’s TGT, who has effectively managed expenses to hit near term expectations at the expense of long-term share, with no clearly articulated plan to win in any environment and a stunning lack of insight as to why the business is struggling in the face of otherwise solid prints by its two closest competitors.  


In the series of charts below, we walk through what we think are the key callouts from the evolving TGT/WMT relationship and why we think TGT is the ultimate loser in this royal rumble. That will ultimately manifest itself in either a) lost market share and pressured margins taking earnings into the mid-$4s, or b) a meaningful reset in expectations as the company doubles down on the investment line to compete with its peer group.


WMT Out-Trafficking TGT

We positioned this chart first in the queue because we think it clearly demonstrates that WMT is winning what we coined the ‘backyard brawl’. To be clear, this is the effect and not the cause of the broader strategic decisions each team is making in order to ultimately drive traffic and win market share. There has been a clear deviation in the trend, with the spread between the two opening up to 1.2% in 1Q and 3.4% in 2Q, both in favor of Walmart. The most recent metric is good for the biggest spread we’ve seen since the TGT data breach in 4Q13, and the widest gap over the past 5 years in a normal environment. Most importantly, we don’t think this a near term statistical aberration, as WMT is putting the dollars behind the up-tick in traffic which will continue to propel outperformance while TGT sits on the sidelines.

TGT/WMT | Backyard Brawl - 8 18 2016 WMT TGT Traffic


Two Different Investment Cycles

This is the cause we referred to earlier, as we’ve seen a huge investment spread open up between TGT and WMT. It started back in mid-2014 around the same time Cornell started his tenure in Minneapolis, and has held steady at nine-points over the past two quarters. That’s important given that Cornell is now two years into his tenure at TGT, and now has his team and strategy in place. Based on what we’ve seen to date, it can be characterized by prudent decision making when it comes to cutting Canada/Rx biz and a reluctance to spend in order to keep pace with the competition. Ultimately, we think the spread between the two needs to change dramatically – and that’s not going to be gifted to TGT from WMT as the latter company has a free pass to invest after it lowered expectations 10 months ago. That means either TGT needs to open its pockets or be content with taking what comes its way.

TGT/WMT | Backyard Brawl - wmt tgt sga


WMT Lean, TGT Bloated

The SIGMA trajectory for each company couldn’t be more different. For WMT: we are looking at a sales/inventory spread of 5% in the US which is a positive set-up for GM going forward and this leverage should continue to offset some of the SG&A pressure felt from investments. For TGT: inventories are building into a slowing sales guide, which we think could add additional pressure on GM in addition to the e-commerce headwind and promotional pressure already being felt.

TGT/WMT | Backyard Brawl - 8 18 2016 WMT TGT SIGMA


Win For TGT

This is the one metric where we will declare victory for TGT in 2Q. Though at 16% growth it’s not going to win a medal. There have been flashes of brilliance over the past 18 months for TGT, but not the sustained growth at a 40% CAGR that management thought was achievable 18 months ago. The key here is that while TGT continues to pull back on capital outlays to fund its e-commerce growth both on the P&L and the balance sheet, WMT went out and spent $3.3bn to acquire talent and technology in the form of The ante chip to compete for brick and mortar retail just went up tremendously.

TGT/WMT | Backyard Brawl - 8 18 2016 WMT TGT Ecomm Spread


Gloom & Doom? No. But Short Healthcare On #ACATaper

Gloom & Doom? No. But Short Healthcare On #ACATaper - stormy

Pick your poison. Whether we’re talking about Fed rate hikes, leverage, slowing utilization or job openings, all spell trouble for Healthcare.

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