The Macau Metro Monitor, November 19th, 2010



According to hospitality sources, overall hotel occupancy will be 80% this week and 90% for Friday and Saturday.  They expect most of the hotels will be up to full occupancy once the Grand Prix event starts this weekend.  ADR is 10% higher YoY.



From Jan-Oct 2010, Macau fiscal revenue reached MOP $62.64 BN (up 37.2% YoY).  Gaming tax revenue hit MOP $52.15 BN (up 58% YoY).  Macau total government expenditure during this period grew 14.7% YoY to MOP $27.3 BN.



The Nevada Supreme Court threw out a lower court's decision to award Richard Suen, a Hong Kong businessman, $58.6 MM for allegedly helping LVS win a gambling license in Macau, ruling that the district court's errors warranted a new trial.  However, legal experts say that a new trial may not be LVS's favor because of the potential bad publicity and because one of its key witnesses, former LVS President William Weidner, is unlikely to be cooperative. Mr. Weidner resigned in March 2009 after almost 14 years at the company amid disputes with Adelson.


China's central bank will raise the reserve ratio by 50 bps to 18.5% from Nov. 29.  The PBoC said the hike "will strengthen liquidity management and control credit."

The Ber-nank Blame

“When you cease to exist, then who will you blame.”

-Bob Dylan


For a global macro analyst, the early morning grind is usually bland. It’s always dark and now it’s getting cold. This morning, however, fired me up! At 530AM EST, Ben Bernanke and his Fiat Friends were holding an academic groupthink session on live TV from Europe.


Before I get into Bernanke’s proactively predictable opening remarks, here’s your morning go-juice:

  1. Bernanke said that calling what the Fed is doing “Quantitative Easing” is “inappropriate”!
  2. As Bernanke was speaking, the Chinese raised rates on their reserve requirements by another 50 basis points (5th time this year)

It’s actually pretty funny. These academic Fiat Fools obviously take themselves quite seriously and while their god of Big Keynesian Government Intervention was speaking, the Chinese poked him again.


At 533AM, the play-by-play hitting the newswires looked like this:

  1. Bernanke says “inflation is expected to be subdued for some time… and the FOMC remains committed to price stability…”
  2. China raises rates again on “global inflation concerns”

You’ll never know what World War III looks likes until it’s staring you in the face, but this war may very well be in motion – a global economic war of both rhetoric and action between the Fiats and the Chinese.


While we wholeheartedly agree with Bernanke that calling Quantitative Guessing (QG) by any other name is “inappropriate”, what we completely disagree with this morning is Bernanke effectively joining the political arms race of blaming the Chinese for American economic problems.


Canadians will remember a South Park song titled “Blame Canada” (it was actually nominated for the Academy Award for Best Song in 1999). For whatever reason the lyrics of this damn song started playing in my head while I was watching Bernanke chirp the Chinese:


                “We must blame them and cause a fuss

                  Before somebody thinks of blaming us!”


It’s really pathetic and sad altogether that the 2010 equivalent of a South Park video has turned out to be the best explanation of what’s really going on here. Xtranormal’s cartoon “Quantitative Easing Explained” video ( has been spreading to the world’s inboxes like wildfire in the last few weeks – last count as of this morning = 1,796,284 views.


Being at the hub of the Hedgeye exclusive network certainly has its privileges. I get to see what we call “the heat” in terms of what serious people care about on a real-time basis. Serious people aren’t just money managers. We have plenty of upstanding people around the world who work in a variety of professions who are sick and tired of being lied to. We offer them a platform to share their voice.


Washington has abused the global privilege of being the world’s fiduciary of the global reserve currency. Everyone who isn’t paid to be willfully blind gets that by now. The days of conflicted and compromised politicians and financiers living in the shadow inventory of American opacity are ending. If it takes a cartoon to expose the truth, sorry Heli-Ben, YouTube is going to smoke your academic dogma out of its hole.


In a roundabout way, this is all very good news. I don’t think I can handle watching American capitalism fold into the hands of crony-socialism for much longer. Plenty of foreign-born entrepreneurs hiring in the American business community feel the same. This isn’t the country that I came to in 1995.


I’m game to play American Capitalist against the socialists. I’ll even wear the red, white, and blue jerseys instead of my homeland’s. While The Ber-nank’s broken promises have perpetuated nothing but JOBLESS STAGFLATION and a global blame game against America’s #1 client (China), I’ve gone about bootstrapping my own American small business, hired 43 Americans, sucked up Obamacare costs like a slurpee, and liked it.


Back to the data, the lastest Nielson survey shows 89% of rural Chinese citizens expecting to see inflation in the next 12 months. Chinese consumer confidence just fell for the 1st quarter in the last 6 and the #1 concern was, take a wild guess blame gamers – inflation. Meanwhile German producer prices (PPI) came in higher again sequentially (month-over-month) this morning at +4.3% year-over-year growth.


Chairman Bernanke, it’s time to think outside of your Great Depression box and strap on some of global macro and accountability pants. If you don’t start seeing the data as it’s reported real time, “when you cease to exist, who will you blame?”


My immediate term support and resistance levels for the SP500 are now 1191 and 1203, respectively. I sold our entire US Equity position (6% position in the Hedgeye Asset Allocation Model) on yesterday’s fleeting US stock market strength. I don’t buy-and-hold what I don’t trust.


Best of luck out there today and have a great weekend,




Keith R. McCullough
Chief Executive Officer


The Ber-nank Blame - 1

FL: The Times They are a-Changin'

Conclusion: Blowout quarter for Foot Locker across all metrics.  Importantly this is only three quarters into a multi-year process.


For those who have been following the company for at least a decade, there is no probably no other time until now where you've seen the words "blowout" and "Foot Locker" in the same sentence.  The times they are a-changin'.


No matter how you slice it, Foot Locker’s 3Q results were nothing short of spectacular.  Same store sales up 8.1%, well ahead of our 5.5% estimate.  Earnings of $0.33, well ahead of our above the Street forecast of $0.20.  Gross margins just about a double from our forecast, increasing by 321 bps.  At the same SG&A was well controlled, although it appears there may have been some slight incremental spend into the quarter’s strong topline. We welcome a step up in marketing and store labor which will only accentuate the progress FL is making towards repositioning its brands.


From a balance sheet standpoint, FL continued to use its cash flow generation for modest share repurchase.  The company bought back $16.4 million worth of shares, paid its dividend totaling $70 million and also made a contribution the company’s pension plan of $40 million.  At quarter end, FL still has $400 million in net cash or just under $3/share.  Impressively, the topline acceleration comes with disciplined inventory management.  Total sales increased 5.4% while inventories declined 2.1%.  This marks the fourth quarter in a row of a positive sales/inventory spread.  We continue to believe after ten years of inventory growth exceeding sales, there is still meaningful opportunity to increase turns, reduce markdowns, and improve gross margins.


The only negative (and it’s a nitpicky one) stems from a lower than expected tax rate, which helped the quarter by $0.04.  All in this is the type of result that only confirms that strategies underway to strategically reposition the largest athletic footwear retailer are working.  Importantly, we do not believe that 3Q results which come only 9 months after CEO Ken Hicks and his team had a chance to influence change,  are the last in which we will see meaningful sales and earnings growth.


With the conference call slated for tomorrow morning, we expect to hear more about the company’s progress on its apparel initiatives, the successful launch of Under Armour basketball, the substantial opportunity that lies ahead in the near term with the accelerating basketball category, and potentially a hint at the company’s efforts to partner with NKE and the NFL on an NFL branded concept.


Our estimates move up to $1.15 for this year and $1.40 for 2011.  Recall that our original thesis called for FL’s 5-year plan to be accomplished in just 3-years.  It appears we and the company are on track.


FL:  The Times They are a-Changin' - FL 3Q


Eric Levine


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.35%

General Mobama

This note was originally published at 8am this morning, November 18, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“There is, in a competitive society, nobody who can exercise even a fraction of the power which a socialist planning board would possess.”

-Friedrich Hayek


Hayek is to the Keynesians of Big Government Intervention what capitalism is to socialism. Watching some Americans beg for the scraps of a short-term socialist experiment this morning is apparently the kind of groupthink that President Obama supports:


“Through the IPO, the government will cut its stake in GM by nearly half, continuing our disciplined commitment to exit this investment while protecting the American taxpayer" –Barack Obama




Hearing our used-car salesmen of professional American politicking talk about “disciplined” investing for the American people must be some sadistic form of a joke. I, for one, will go on the record today calling this GM deal out for what it really is – socialism. General Mobama, nice trade.


Co-founder of investment banking outfit Evercore Partners, Roger Altman, loves this short-term trading of American capitalism for privileged socialist handouts. His firm was paid upwards of $46 MILLION in pre-GM bankruptcy fees and allegedly wants another $17-18 MILLION in what bankers call “success fees” for this GM deal going off with a bang this morning. Roger, nice trade.


I couldn’t make this up if I tried, but Roger met with General Mobama earlier this week to talk about his post GM deal day job. Roger likes to trade the banking-fee-cycle with time moonlighting in DC. And apparently the President of the United States liked doing this GM deal so much that he is considering Altman as Larry Summers replacement at the White House.


Wait, is Altman a banker or a politician? Sadly, when getting in tight on these socialist handout jobs, one is a prerequisite for the other. Roger Altman has an impeccable resume in old-boy network banking and politics:

  1. 1974 he became Partner at Lehman (banker)
  2. 1977-1981 he served as Assistant Secretary of the Treasury (politician)
  3. 1981- 1987 he went back to Lehman and became co-head of investment banking (banker)

Oh yeah baby, that’s the change General Mobama is talking about. Let’s bring back someone who really understood Jimmy Carter and Arthur Burns style economics and let’s get this Jobless Stagflation party started.


Don’t worry, you won’t be disappointed in this storytelling. The deeper you dig into a pile of dogma the more it smells. Altman loves working at places that lever and lather themselves up with cheap moneys. After Lehman, he did LBOs at Blackstone (banker). Then, in 1993, he went back to Washington as Deputy Treasury Secretary (politician) for the only 2 years that resembled 1970’s style US Jobless Stagflation until… well… today!


No matter where you go in America this morning, this is where we are. I, for one, won’t let my son and daughter YouTube me on this day of November 18th, 2010 as one of the pretending patriots who supports socialist bailouts.


Back to the market…


Today’s pump and dump government rally should provide a fantastic opportunity to put some of our short positions back on (in the Hedgeye Portfolio we currently have 15 LONGS and 10 SHORTS). The US stock market has only had 1 UP day in the last 8. In the last 2 days the SP500 became what our Hedgeyes call immediate term TRADE oversold.


Yes, like your US government, we trade…


In terms of the Hedgeye Asset Allocation Model, in the last week, on weakness, we’ve scaled back up to 6% positions across the board (from ZERO percent at the market top on November 8th) in US Equities, International Equities and Commodities. We are long US Healthcare (XLV), Germany (EWG), Corn (CORN), and Gold (GLD). All of these positions are candidates to be sold. Our current asset allocation to Cash = 58%.


Yes, like any free market capitalist, we reserve the unalienable right to see this government sponsored casino for what it has become…


In terms of levels on the SP500, going into today’s open, from the 1178 level, we measure 2:1 upside with a significant level of immediate term TRADE resistance up at 1191. If the SP500 closes above 1191, that’s bullish. If it breaks, that’s bearish.


In the face of 1. Global Growth Slowing 2. Global Inflation Accelerating, and 3. Interconnected Risk Compounding, I don’t want a banker or a politician telling me how to manage risk. I need a transparent and accountable General who I can trust gets this game – and I guess, for now, that will have to be me.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


General Mobama - JC



November 18, 2010





  • ROST noted that the recent buying environment has been slightly more favorable as a result of Asian supply chain disruptions and erratic sales patterns at retail.  This favorable buying has resulted in a year over year increase of 500bps in the company’s packaway levels. 
  • Momentum continues in the dollar store space with DLTR reporting its strongest comp of the year up 8.7% against tough compares.  This is the second highest comp in over 7 years!
  • According to our weekly trend data, Skechers officially broke its positive sales momentum posting the first decline in year-over-year sales since June 2009 with toning trends (sales and ASPs) continuing to deteriorate.



Lopez/Anthony Embark on Fashion Line at KSS - Jenny from the Block is back in fashion. Jennifer Lopez, along with her husband, Marc Anthony, will today unveil a new lifestyle fashion venture with Kohl’s, multiple sources told WWD. The superstar couple is slated to be front and center at a press conference on the rooftop of the London Hotel in Los Angeles this morning, where they will join Kohl’s Corp. executives to publicize the partnership, which includes Hong Kong-based sourcing giant Li & Fung on the production side. The deal, which likely extends beyond men’s and women’s apparel to other categories, such as home, could eventually generate up to $3 billion in sales, added sources. The Kohl’s deal marks a return to the fashion business for Lopez since she shuttered her Sweetface contemporary sportswear brand in 2009. This new deal marries Lopez and Anthony with the Menomonee Falls, Wis.-based department store retailer that operates 1,089 stores in 49 states. The duo will join Kohl’s stable of exclusive brands that include Simply Vera Vera Wang, Candie’s, Daisy Fuentes, Tony Hawk, LC Lauren Conrad and Avril Lavigne’s Abbey Dawn. <WWD>

Hedgeye Retail’s Take: Despite closing down her Sweetface sportswear brand last year, JLo has had success at retail. While a $3Bn opportunity may sound optimistic, recall that Lopez has generated more than $1Bn in sales from her 16 fragrances since 2002. With Marc onboard for a men’s apparel line, KSS has locked up one of the more dynamic high-profile couples in fashion.


Gap Enters South America - Gap Inc., though still struggling in the U.S., keeps advancing its overseas expansion.  In September, the $14.5 billion retailer will open its first store in South America, in the Parque Arauco mall in Santiago, Chile. A franchise agreement has been signed with Komax, which has the exclusive rights to operate Gap brand stores in Chile. Komax purchases the merchandise from Gap and must adhere to Gap standards. Komax has franchise agreements with other well-known retailers, including The North Face, Brooks Brothers and Ralph Lauren. Gap did not state how many stores it expects to see in South America. Gap said, with Chile, it will have stores in 25 countries on six continents. “We are looking forward to offering Gap’s modern, cool American designs to customers in a retail sector that is strong, and has an exceptional demand for fashion,” said Stephen Sunnucks, president, Gap Inc., Europe and strategic alliances. “Komax has impressed us with their local expertise in the market and proven track record of launching international brands to customers in Chile.” Gap has 165 franchise stores in Eastern Europe, Latin America, the Middle East and Australia. By 2015, the company expects to have 400 franchise stores. <WWD>

Hedgeye Retail’s Take: International expansion continues to be a sizeable opportunity for the brand, however, doing so through franchise agreements not only limit risk, but upside on the P&L as well. 


Stride Rite Enters China - Parent firm Collective Brands Inc. announced a licensing and development deal with Li & Fung Retailing to launch the children's footwear brand in Greater China and Southeast Asia. Under the deal, a newly formed subsidiary, LiFung Children Holdings Ltd., will market the brand through standalone retail stores, shop-in-shops and e-commerce in Hong Kong, mainland China, Singapore, Taiwan, Macau, Malaysia and Brunei. The move marks the first time Topeka, Kan.-based Collective has brought any of its retail concepts or brands to mainland China. Initial plans call for the opening of retail outlets in Hong Kong, Singapore and Malaysia next month, followed by stores in China in 2011. "We are excited to partner with LiFung Children Holdings to bring Stride Rite to Asia," Sharon John, president of Stride Rite Children's Group, said in a statement. "We look forward to bringing shoppers across the region our range of products for children, as well as a store format dedicated to properly fitting the child and servicing parents and grandparents.” <WWD>

Hedgeye Retail’s Take: While the company’s recent Middle East franchise is a substantially larger deal initially, entry into China is notable nonetheless. Our sense is that after initial tests, Li & Fung will be properly incentivized to ramp store growth depending on brands reception.


Black Friday Discounts to Expect at KSS & TRU - In anticipation of Black Friday, Kohl's and Toys"R"Us have revealed their savings and doorbuster deals for the day after Thanksgiving. Kohl's will roll out its holiday sales at 3 a.m. on Nov. 26. Fifty percent off will be offered on toys from Fisher-Price, Playskool, Littlest Pet Shop, Hot Wheels, Matchbox, Tonka, Little Tikes, Crayola and Play-Doh. In addition, the retailer's exclusive brands will also see discounts, including on Simply Vera Vera Wang, LC Lauren Conrad, Food Network, Elle Contemporary Collection, Elle Décor, Dana Buchman, Candie's, Tony Hawk, Apt. 9, Chaps, Jumping Beans and Sonoma Life + Style. Meanwhile, TRU will open its doors at 10 p.m. on Thanksgiving night with more than 150 deals on toy, games and electronics. The savings will be available until 1 p.m. on Nov. 26. An additional 50 doorbuster deals will kick off at 5 a.m. on Nov. 26. Limited-edition items, such as Justin Bieber figures, as well as free Crayola 64-packs and coloring books with any purchase, will also be featured. Finally, 60 unadvertised deals will be announced on and beginning at 12:01 a.m. on Nov. 23, which will be available in stores only between 10 p.m. on Thanksgiving and 1 p.m. on Nov. 26. <licensemag>

Hedgeye Retail’s Take: Here come the door-buster deals we have all come to expect. The incremental .com offerings at TRU exhibit the company’s competitive leg up on the technology front. 


AMZN Dips a Foot into Film - Inc. today introduced Amazon Studios for filmmakers hoping to wow the world with their movies. The world’s largest online retailer says it has set aside $2.7 million in monthly and annual prizes, which Amazon plans to award by Dec. 31, 2011. The efforts focus more on commercial potential than artistic merit, with Amazon listing making money first among traits it will look for in submitted materials.  “Winning screenplays and full-length test movies will be selected on the basis of commercial viability, which will include consideration of premise, story, character, dialogue, emotion and other elements of great movies,” Amazon says. Amazon has struck a deal with Warner Bros. Pictures that calls for Amazon Studios to produce the best projects, which will then go to Warner Bros. for a first look. Amazon can produce the movie with another studio if Warner Bros. passes. If Amazon Studios releases a film to theaters, the filmmaker or screenwriter receives $200,000 for the rights and a $400,000 bonus if the film earns at least $60 million in the United States. <internetretailer>

Hedgeye Retail’s Take: Historically a boom/bust type business, the internet giant finds yet another avenue for growth. In today's youtube-happy and tech savvy youth, Amazon's widely cast net will likely result in some success. One of the questions will be whether the studio is staffed  appropriately to handle the level of response it's likely to receive.


M&A Overseas - Selfridges Group Ltd. is adding to its stable of retail brands. The group, parent of the British department store, said this week it plans to acquire the Dutch luxury retail chain de Bijenkorf from the Maxeda Retail Group for an undisclosed sum. De Bijenkorf, Holland’s leading fashion and luxury goods retailer, has been in operation since 1870, and has a chain of 12 stores. Selfridges Group is expected to complete the deal and take ownership in early 2011. “De Bijenkorf is an excellent addition to our portfolio of international stores,” said W. Galen Weston, chairman of Selfridges Group. “This is an exciting opportunity for us to expand in Europe. Our long-term view and strong financial position will further enhance de Bijenkorf and offer a world-class experience to all parts of the Netherlands,” he said. The company said Paul Kelly has been named managing director of Selfridges Group Ltd., and will oversee the new business. Kelly was formerly chief executive officer of Selfridges and retailer Brown Thomas in Ireland. <WWD>  

Hedgeye Retail’s Take: Perhaps better known for their architecture than shopping, makes sense for the UK department store to diversify away from the British economy.


Consumer Brand Preference Study - Kohl’s, Neiman Marcus and H&M were among the category leaders in consumer preference in a study conducted by L.E.K. Consulting. The Retailer Preference Index helps retailers gauge who their nearest competitors are, based on consumer preferences. Criteria studied included product variety, perceived value for the money, service quality, ease of navigation in the store and fit. About 3,000 individuals were interviewed for the semiannual survey during the third week of October. Kohl’s came in as the top department store, followed by J.C. Penney and Macy’s, with Dillard’s and Sears rounding out the top five. Shoppers at premium department stores ranked Neiman Marcus first, followed by Nordstrom, Saks Fifth Avenue and Bloomingdale’s. Charlotte Russe was the leader among teen specialty chains, followed by Forever 21, Hollister, American Eagle Outfitters and Aéropostale. In women’s specialty retailing, H&M and Victoria’s Secret were a very close one and two, according to survey respondents. Old Navy, Ann Taylor Loft and Limited rounded out the top five. Ann Taylor ranked 16 out of 19 in the women’s specialty category, with New York & Co. in sixth place, Gap in seventh, J. Crew in 10th and Urban Outfitters in the 15th slot. <WWD>

Hedgeye Retail’s Take: A few noteworthy parings including New York & Co. still besting the likes of JCG and URBN in consumers eyes.


M&A in MMA - Authentic Brands Group, which recently acquired the Tapout brand, has purchased Sinister, an apparel and accessories company with origins in the mixed martial arts space.  Known for its early relationships with UFC champions like Chuck Liddell and Rampage Jackson, the Sinister brand has grown up along side the fastest growing sport in the world. "This acquisition completes our mixed martial arts stable of brands that will now reach all tiers of distribution," said Jamie Salter, chief executive of Authentic Brands Group. "Not only is Sinister's distribution at Kmart and Sears highly appealing but they have a world-class partnership with Hybrid, one of the best-in-class apparel licensees in the business." In addition to Sinister, Authentic Brands Group's MMA holdings consist of TapouT, TapouT Pro, TapouT MPS, TapouT Vintage, Silver Star Casting Company, Iron Star and Hitman Fight Gear. Sinister has been involved in mixed martial arts and the UFC since 1998, and became an official partner of the UFC in 2008. Its long-term relationships both with the UFC and its roster of athletes have been integral to the brand's growth and its introduction to new consumers. <SportsOneSource>

Hedgeye Retail’s Take: Mixed Martial Arts (MMA) is quickly becoming one of the most consolidated industries with a flurry of deals over the last few months leaving Authentic Brands with one of the most attractive portfolios in the space.  


China Leather Shoe Exports Grow - China’s leather shoes exports in September recorded a growth of 22.8% in volume and 40% hiking in value, while the total amount of exports for the first nine months reached 770 million pairs that are worth US$7.92 billion, up 14.6% and 25% respectively, according to the China Leather Industry Association. For the same period of last year, leather shoe exports reported a 23.8% decline in pairs and a 15.7% drop in value. In terms of imports, the value saw a growth of 25.1% year on year to US$420 million, and pairs up 11.1% to 11.22 million. The average value for per pair of imported and exported leather shoes maintain steady growth, with an increase of 9.1% on exports to US$ 10.28 for per pair and 12.6% growth on imports to US$36.99 for per pair. <FashionNetAsia>

Hedgeye Retail’s Take: Our sense if that the 9% increase in value per pair likely reflects the embedded cost escalation realized over the past year rather than an improved level of quality.


India Luxury Market The Indian luxury market has grown 13% over the past 3 years and is currently estimated to be $4.76 billion and is set to grow by 3 times by 2015 and apparel brands form a significant part of this growth especially in the category of menswear, according to Sanjay Kapoor, Chairman, CII Luxury Goods Forum, & MD of Genesis Luxury Fashion. "Informing about the current consumer preferences and spending traits, he said, "Jewelry, watches and accessories are the current largest categories and a new trend in apparel is the emergence of the 'menswear' luxury brands. Men too are becoming appearance and brand conscious and classic menswear brands such as Canali are finding favour with Indian men in the 35-44 age bracket, while younger men in the age bracket of 21-35 are dressing up in brands such as Paul Smith, Kenzo and Etro." Elaborating on the various factors, driving this market trend, he noted, "The economy is clearly on a recovery mode and men are beginning to spend on themselves too. They are well-traveled, and while earlier they shopped for their favourite brands overseas, now they can find the same brands in India too, hence it is far more convenient to buy here, the prices being almost the same, along with which, brands have their latest season collections in the boutiques here.” <FashionNetAsia>

Hedgeye Retail’s Take: There’s little question about the potential opportunity, what limits most retailers from stepping up plans to enter India continues to be the government controlled FDI restrictions.


Europe’s Band-Aid Rollercoaster

Position: Short Euro via FXE; Long Germany (EWG)


We want to make the quick point that although European equity indices look to be pricing in some form of bailout for Ireland today—most indices closed up +1.5% today across western and eastern Europe and Greece's ATHEX gained +2.6%—Europe’s sovereign debt crisis is far from over.


While this is an obvious point given the media’s attention on Europe’s debt and deficit ails, it’s worth restating our position that we believe there is a fundamental economic flaw in the Union of unequal states (the Eurozone), whereby states are effectively handcuffed from using monetary policy measures, such as inflating away debts or increasing trade competitiveness through currency debasement, to better maneuver economic developments.


While Greece got its €110 billion band-aid in May of this year and Ireland will soon get its own, the underlying “issues” afflicting the region cannot be solved with one-off bailout packages. On the contrary, we think that piling more debt upon debt is only going to compound the interconnected risk associated with the long-term issue.


While it could be argued that the Union of different parts proved beneficial to the whole in “good” economic times, the downturn from the world’s great recession is demonstrating a far different outcome and outlook for the Eurozone’s bound states.  


In particular, we’d expect that bond yields for Europe’s fiscally imbalanced countries to maintain a wide spread over credit-worthy German paper as sovereign debt concerns persist into 2011.


As the chart below shows, despite the performance of today’s equity market across Europe and a slight decline in government bond yields from the PIIGS since an immediate term high on 11/11, we’d expect government yields across Europe’s periphery to continue to rise.


As yields push up so too does the cost of capital which further strains a country’s ability to refinance and raise debt, which in turn snowballs the perceived sovereign default risk. And so the cycle of credit risk, short of bold austerity measures to cut debt and deficit levels, persists gravely…  


Matthew Hedrick



Europe’s Band-Aid Rollercoaster - mh1

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