CHART OF THE DAY: Asian Growth Slowing as Inflation Accelerates



CHART OF THE DAY: Asian Growth Slowing as Inflation Accelerates -  Chart of the day

Transitory Expectations

“Man’s life is brief and transitory, literature endures forever.”

-Persian poet


I’m in the middle of reading Rory Stewart’s The Places In Between where he tells the risk management story of walking alone across Afghanistan. He ends one of his  chapters with that quote. It got my attention.


It should have. Every morning, day, and night, we market people walk alone with our P&L. We can’t drop our track record on someone else’s lap. We can’t pretend it’s not there either. No matter where we go, there it is…


That’s not life, but it’s certainly a big part of mine. Within that part, there certainly are a lot of places in between. All the while, I suppose I’m challenged with building bridges in a lot of those places between market prices and Transitory Expectations.


From a US-centric stock market investor’s perspective, expectations for this morning’s US Employment Report are extremely elevated. From a Global Macro investor’s perspective, from Indonesia getting tagged for a -2.8% loss overnight on inflation concerns to Gold testing 5-week lows, there’s a lot more going on.


That’s not to say that a Transitory Expectation for a US-centric economic data point doesn’t matter to Global Macro Risk Managers. It does this morning. Big time. But what exactly are those expectations and how can we proactively prepare to profit from them?


In an intraday note yesterday titled “Government Whispering”, this is how we framed it up:

  1. A Whisper of 580,000 US payroll adds has been going around all week
  2. Every market rally (from Wednesday’s pre-market futures lows) has been followed up with people reminding me of the whisper
  3. Government Whispering is turning into the casino that Big Government Intervention built into our markets – get used to it 

Where are we at on estimates versus expectations: 

  1. First, always remember that governments, to a degree, manipulates these numbers
  2. In our most bullish scenario, the payroll number could be at least 3x consensus (it started the wk at 125,000 which is a bit of a joke)
  3. The question now is can it be 2x that (or better than the whisper of 580,000)? 

In terms of what an improving (in the very short term) US jobs picture actually means for the interconnected macro markets: 

  1. BONDS: are definitely baking this in (collapsing UST’s have been since NOV and UST yields are bullish TRADE, TREND, and TAIL in our model)
  2. CURRENCY: definitely (maybe overly) baking this in (USD had a monster week, up +2.3% for the week-to-date ahead of the print)
  3. STOCKS: are trying their best to bake this in, but I think they’re going to look late – too late because they usually are

That’s the thing about Transitory Expectations in markets – by the time consensus realizes what they are, they’ve moved onto the next.


The key, in both Global Macro risk management and in life, may very well be to live in the moment. I’m not Buddhist, but I do respect the thought process behind the principle of playing the game that’s in front of you. After this morning’s US Employment Report is printed, that game is gone.


Post the 830AM EST report, I think US-centric investors will be forced to face the fiddle on the Expectations Mismatch between what they think the US Consumer is doing now versus what the US Consumer did in November to early December.


While everybody was pumping up Transitory Expectations of tax cuts and QG2 into their year-end Consumer Discretionary portfolios, evidently there was this little critter called reality toiling in the night.


At first, the Consumer Discretionary bulls said Best Buy’s (BBY) collapse was “secular” to their business. Then they said that McDonald’s (MCD) breaking down was due to some hedgies rotating into Best Buy because, I guess, Ackman was going to charge 2 and 20 to buy that one low. Now they’re saying that a broad based selloff in the Consumer Discretionary sector yesterday was due to the snow?


Here’s what some major US-centric Consumer Discretionary names (I mean names with market cap) did yesterday:

  1. Target (TGT) = -7.4%
  2. Gap (GPS) = -6.9%
  3. Macy’s (M) = -4.0%

I guess, with the Consumer Discretionary sector being the top US Sector performer in 2010 at +25.7%, bullish Transitory Expectations were a little off…


Back to the Global Macro risk management picture of Global Growth Slowing as Global Inflation Accelerates, most Asian and European stock markets have been sufficiently adjusting their bullish expectations to the downside all week. Last night, in addition to Indonesia trading down a ton, India was down -2.4%, Thailand lost -1.4%, and Taiwan was down -1.1%. After closing down -17.4% in 2010, Spain is already down -2.7% for 2011 to-date.


If the US stock market perma-bulls want to tell me that all of Asia and parts of Europe are slowing because US growth is strengthening, they can go do that. But they may very well have to adjust their Transitory Expectations after the last lagging bullish economic data point from Q4 is out of the way.


My immediate term support and resistance levels for the SP500 are now 1264 and 1280, respectively. Yesterday, I raised 3% cash, taking our allocation to US Cash back up to 52% in the Hedgeye Asset Allocation Model by selling our 3% position in Healthcare (XLV) on strength. We remain long the US Dollar via the UUP and short Gold (GLD).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Transitory Expectations - ja


TODAY’S S&P 500 SET-UP - January 7, 2011

As we look at today’s set up for the S&P 500, the range is 16 points or -0.77% downside to 1264 and 0.48% upside to 1280. Equity futures are trading below fair value in a continuation of Thursday's retreat prompted by disappointing Dec retail sales data and ahead of today's employment data and Bernanke testimony to the Senate Budget Committee.



  • 8.30am, Payroll figures: Change in nonfarm payrolls, est. 150k, prior 39k  Change in private payrolls, est. 175k, prior 50k  Change in manufacturing payrolls, est. 5k, prior (-13k)
  • Unemployment rate, est. 9.7%, prior 9.8%
  • 9.15am, NY Fed’s Tracy to speak in Hartford, Conn.
  • 9.30am, Fed’s Bernanke to Testify Before Senate Budget Panel
  • 11am, Fed to purchase $6b-$8b notes/bonds
  • 3pm, Consumer Credit, Nov., est. $0.5b
  • 4.30pm, Fed’s Evans Speaks on Monetary Policy in Denver
  • 4.30pm, NY Fed’s McAndrews Speaks on Panel in Denver


  • Best Buy will offer its take on the holiday season with a sales release pre-mkt
  • Blackstone in exclusive talks to buy London’s Chiswick Park office complex for ~$740m including debt, the Financial Times reports, without saying where it got the information
  • Obama names William Daley as his White House chief of staff as part of a series of moves to keep the administration’s focus on the economy, improve relations with business and deal with a divided government.
  • Today Obama will name Gene Sperling to lead National Economic Council.
  • KB Home will provide a window into the housing market as it reports 4Q results.
  • Amgen (AMGN) and Xencor will collaborate to develop an
  • autoimmune disease antibody
  • Borders Group (BGP) US in talks with Jefferies on restructuring, CNBC says, citing WSJ
  • Immucor (BLUD) 2Q profit, rev. beat ests
  • Liz Claiborne (LIZ) preliminary 2H profit missed goal
  • Schnitzer Steel Industries Inc. (SCHN) 1Q rev. missed est.
  • Shaw Group (SHAW) 1Q rev. missed est.
  • Volcano (VOLC) rated new outperform at William Blair
  • Volterra Semiconductor (VLTR) preliminary 4Q EPS below ests., forecast, est. -131


  • One day: Dow (0.22%), S&P (0.21%), Nasdaq +0.28%, Russell 2000 (0.46%)
  • Last Week: Dow +0.03%, S&P +0.07%, Nasdaq (-0.48%), Russell (-0.67%)
  • Month/Quarter/Year-to-date: Dow +1.03%, S&P +1.29%, Nasdaq +2.15%, Russell +0.99%
  • Sector Performance - BEARISH (Only 3 sectors positive) - Energy (0.95%), Cons. Disc (0.61%), Financials (0.66%), Materials (0.52%), Cons. Spls (0.34%), Industrials (0.17%), Utilities +0.10%, Healthcare +0.41%, Tech +0.58%        


  • ADVANCE/DECLINE LINE: -657 (-1283)  
  • VOLUME: NYSE 1093.30 (+4.83%)
  • VIX:  17.40 +2.23% YTD PERFORMANCE: -1.97%
  • SPX PUT/CALL RATIO: 0.86 from 1.81 (-52.57%)  


Treasuries were stronger yesterday

  • TED SPREAD: 16.62 0.304 (1.866%)
  • 3-MONTH T-BILL YIELD: 0.15% +.01%    
  • YIELD CURVE: 2.76 from 2.79


  • CRB: 325.07 -1.25%
  • Oil: 88.38 -2.13% - trading +0.37% in the AM
  • In early trading crude oil rebounds from lowest in three weeks
  • COPPER: 432.95 -1.78% - trading -1.49% in the AM
  • copper falls in London on speculation of more tightening
  • GOLD: 1,373.15 -0.22% - trading -1.1% in the AM
  • Gold is right down to our intermediate term TREND line of support this morning


  • India to Boost Oil-Palm Plantation Area to Reduce $8.4 Billion Import Bill
  • Gold in Euros to Outperform Gold in Dollars, ABN Says: Technical Analysis
  • Queensland Towns Watch Rivers Rise as Waters Threaten Livestock, Property
  • Wheat Heads for Weekly Drop on Speculation USDA May Lower Exports Estimate
  • Germany Blocks Farms' Meat, Egg Sales After Finding Dioxin in Animal Feed
  • Hainan Rubber Doubles in Shanghai Debut on Strong Demand, Growth Outlook
  • Palm Oil Declines as Rally to 34-Month High Increases Soybean Oil Appeal
  • Japan Minister Urges Lower Rice Tariff, Free Trade, Talks With North Korea
  • Cotton Output in Australia May Be Cut 500,000 Bales on Flood, FCStone Says
  • Copper Stockpiles in Shanghai Advance to Six-Month High; Zinc at Record
  • Sugar May Rise Next Week on Speculation Demand Will Increase, Survey Shows


  • EURO: 1.3028 -1.18% - trading -0.38% in the AM
  • DOLLAR: 80.847 +0.73% - trading +0.17% in the AM


  • European Markets: FTSE 100: (0.29%); DAX: 0.17%; CAC 40: (0.43%)
  • European markets mainly trade lower with major indices reversing modest opening gains as investors focus on US Dec nonfarm payrolls data due later in the session.
  • Peripheral European debt worries persist and weighed on bond spreads and the euro.   Spain and Portugal down 1.30% and 1.14%, respectively
  • Declining sectors lead advancers 16-2 with oil & gas and banks leading fallers down close to (1%) and auto's up +0.3%, leading gainers.
  • Germany Nov preliminary retail sales +2.0% y/y vs consensus +3.2%, (2.4%) m/m vs consensus +0.1%
  • UK SMMT Dec new car registrations (18.0%) y/y, to 123,817 units, forecasts market to decline by (5%) in 2011 to 1.93M units
  • Eurozone Q3 GDP 1.9% y/y vs consensus 1.9% and prior 1.9% Eurozone Q3 GDP 0.3% q/q vs consensus 0.4% and prior 0.4%
  • Germany Nov Industrial Output (0.7%) m/m vs consensus (0.2%) and prior revised +3.0%
  • Eurozone Nov Unemployment 10.1% vs consensus 10.1% and prior 10.1%


  • Asian Markets: Nikkei +0.1%; Hang Seng (0.4%); Shanghai Composite +0.52%
  • More Asian markets fell than rose today as investors awaited US non-farms payrolls data coming later.
  • Banks led China up 0.52%, though it finished well of its intraday high. But metals stocks fell late in the day on renewed tightening fears.
  • South Korea rose 0.41%, but Samsung Electronics lost 1% on saying its Q4 profit probably fell.
  • Japan +0.11 traded in a very tight range all day. Carmakers rose on recovering sales in the US and a weaker yen.
  • Australia declined -0.42%, with miners and banks going down, partially offset by higher industrial and consumer issues.
  • Hong Kong traded -0.42%. 
  • Indonesia’s stocks fell 2.81%, driving the benchmark index to its biggest two-day loss in more than seven months.  Concerns the central bank has fallen behind regional neighbors in taking action to curb inflation.
  • India down 2.44%



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Ho Ho, No

There’s no question expectations were high headed into today’s December sales day and results ended up largely disappointing.  Overall, we observed a near 50/50 split of beats to misses with far fewer earnings “guide-ups” than most expected.  So where did all the whispers, MasterCard SpendingPulse studies, WikiLeaks go wrong?  First, the cadence of the month was hardly linear, with most retailers reporting strength in the earlier half of December vs. the latter.  Nothing new here as sales have been volatile on a weekly basis throughout much of 2010, even in the standout periods of March, May, and November.  Second, the environment was promotional and perhaps a bit more so than we thought.  Third, the weather did have some impact, but this was actually one of the more muted months for making excuses.  Only a few retailers even mentioned weather as the culprit, let alone quantify its impact. 


The bottom line here is absent expectations and sentiment that reached fever pitch levels, the actual overall comp growth for the entire 25 company reporting base was 3.4%, exactly in line with the run-rate we observed since June.  The only caveat being November (+6.6%), which set the bar abnormally high heading into the more important month of December.  Either way we look at it, without a reason (i.e holiday) to spend in the near to intermediate term it’s becoming increasingly difficult to paint a picture of accelerating demand.


Ho Ho, No - Dec SSS


As always there were several unique callouts from today’s monthly results:


  • High-end clearly outperformed with SKS and JWN reporting strong results both on an absolute and relative-to-expectations basis.  In the case of SKS, this number may have been even higher had the blizzard not had an impact on the company’s flagship NYC store (about 19% of the company’s annual sales).
  • Off-price was another standout, with both ROST and TJX reporting better than expected and positive comps against very difficult comparisons.  Both companies raised guidance.  However, the more telling data point was ROST’s statement that their “merchants have been able to take advantage recently of a large amount of compelling close-out opportunities in the marketplace.”  Recall that disruption in the marketplace is hugely beneficial to the off-price model and this one of the more bullish comments we’ve seen on the topic of inventory availability in over a year.  On the flip side, to take advantage of such buys ROST saw pack-away rise to 47% from 39% for an increase in inventory of 19%!
  • If there’s any hope for a recovery in consumer electronics, it will have to come from CES and not from COST.  The club operator noted that December sales of consumer electronics were down  high single digits, driven by a slightly negative comp in TV’s compounded by weakness in cameras, navigation, and hardware.  Computers were positive. 
  • COST continues to confirm Hedgeye’s view on inflation, with the company noting that fresh food costs were up mid single digits while overall food and sundries saw inflation on the magnitude of 100 to 200 bps.  This marks an acceleration in the monthly trends they’ve been consistently noting.
  • TGT’s disappointing 0.9% comp store increase leads to many more questions than answers, even in the context of overall weakness for most retailers during the month.  The slight increase calls into question the effectiveness of the company’s recent nationwide rollout of the 5% reward program as well as continued push via “P-Fresh” into more consumables.  Yes, it’s still early to know if the program’s nationwide adoption rate has been below plan, but there’s no question that this incremental sale driver is not an immediate solution to accelerate sales growth.
  • While PIR and CPWM are not the best proxies for overall demand in the home category, they do stand out as substantial sales outperformers during the key holiday season.  This is also consistent with robust, pre-holiday results from BBBY.  If anything, the category remains less promotional than the fashion apparel landscape.
  • There were no shortage of positive e-commerce callouts with KSS reporting a 66% increase in sales, URBN +28%, M +28.4%, AEO +LDD, ANF +59%, and +78%.
  • Sometimes comparisons are overrated.  Nordstrom reported its 16th month in a row of increased traffic trends.

Eric Levine


Pondering Chinese Growth

Conclusion: Is an intermediate-term hard landing for the Chinese economy priced into global equity markets? We don’t think so.


Though we focus exclusively on research, our internal buyside process and exclusive network of client feedback provides us with some rather sophisticated questions that often lead to key conclusions which shape our global macro framework. One question that came up recently was:


“Will China experience a hard landing and, if so, is the spectre of that priced in?”


Addressing the question in reverse order, I’d have to say there’s negative data priced into any market that closed 2010 down (-14.3%). Further, the Shanghai Composite is down (-10.6%) since it peaked on November 8, suggesting new concerns may be on the horizon. Those concerns are born out of the possibility that China may aggressively tighten monetary policy in 2011, as China looks to ward off inflation currently at 28-month highs:


Pondering Chinese Growth - 1


For months, we’ve been getting explicit signals from China’s central bank that they will be “prudently” fighting inflation in 2011, so the prospect of a hard landing as a result of aggressive tightening doesn’t seem that far from the realm of possibility. Liquidity is slowly and surely being removed from China’s financial system. In fact, that’s what the Chinese money market is telling us currently: 

  1. China’s Seven-Day Repurchase Rate, which measures interbank funding availability may average 2.9% in 1Q11 up from a two-year high of 2.75% in 4Q10, according to the median estimate from a recent Bloomberg survey. The rate is currently at 3.14% after dropping (-320bps) this week.
  2. The one year-interest rate swap (fixed cost needed to receive the seven-day repo payments) has gained +120bps since August, which reflects concerns over a potential cash shortage within China’s financial system.
  3. Contracts linked to the yuan’s future value now predict a +2.7% appreciation in one year – up from just +2% less than a week ago! We read this as the Chinese currency market just got 35% more hawkish in their forecast for Chinese monetary policy and the resulting speculative inflows. 

Pondering Chinese Growth - 2


Bloomberg consensus forecasts for Chinese GDP growth in 4Q10 and 1Q11 are +9% YoY and +8.4% YoY, respectively, indicating consensus expects a moderate slowdown, yet still robust growth. What if, because of a potential shortage of cash to support China’s investment-driven economy, growth slows to something closer to +6-7% YoY in 1H11?


Pondering Chinese Growth - 3


While I can’t say we have a definitive answer for that at this juncture, the question is worth bringing to your attention. While news of past and potential future rate hikes dominate the Chinese headlines, we posit that a shortage of cash brought on by the collective fears of additional tightening by Chinese lenders may end up causing the Chinese economy to slam harder on the breaks than currently anticipated.


The obvious inference is that, should this occur, it would likely be a very negative event for global equity investors, as the country which led the world into a global recovery in 2009 experiences a meaningful slowdown. While +6-7% YoY GDP growth is nothing to scoff at, an incremental (-200bps) draw-down in Chinese growth relative to already “slow” expectations for the next 2-3 quarters is a risk worth considering if you’re pondering getting long anything equity-related right here and now.


A tail risk worth considering here as well is China’s new 5-year plan, which is to be released in March 2011. Many investors expect it to be bullish for China’s consumer sector, as it attempts to rebalance the economy to a more sustainable growth model. To date, I haven’t heard anyone mention the possibility that it may come with a more explicit slowdown in the Chinese growth model from the current high-single-digit-to-low-double-digit trajectory to a more modest mid-single-digit pace. While we won’t know until we know, we do know that this scenario is outside of consensus expectations.


Darius Dale


Us vs. Them

This note was originally published at 8am on January 06, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“For some of them, inflation is not so bad; they even ask for a continuation of it, because they are the first to profit from it.”

-Ludwig von Mises


“For some of them” – that’s a critical preface, to a critical economic statement, during critical global economic times. If you’re reading this right now, consider yourself just like me . We are the fortunate ones. We can make money being long inflation.


If you haven’t read von Mises’ Fourth Lecture titled “Inflation”  yet (in Economic Policy, Ludwig von Mises speeches; Argentina 1959), you should. On page 45 he goes on to write that:


“And there are always people who favor inflation because they realize what is going on sooner than other people do. Their special profits are due to the fact that there will necessarily be unevenness in the process of inflation… But of course, the politician in power who proceeds toward inflation  does not announce: I am proceeding toward inflation.”


Unlike the Big Government monetization of debt experiments gone bad of Jimmy Carter (and then Bernanke-Lite Fed Head, Arthur Burns), how appropriate the lessons of history are that stand the test of time…


I’m long inflation.


In fact I got longer of inflation on the “buying opportunities” I have seen in commodities and currencies throughout the week. I have taken my asset allocation to Cash down in the Hedgeye Asset Allocation Model from 61% (at the beginning of the week) to 49% as of yesterday’s close.


How does one get long of inflation?

  1. Buy Commodities (we’re long oil, OIL, corn, CORN, and sugar, SGG)
  2. Buy Currencies whose countries have inflationary trends and an upward bias to interest rates (we’re long US Dollars, UUP, and Chinese Yuans, CYB)
  3. Short Bonds (we’re short short-term US Treasuries, SHY)

Of course, you can be long stocks too, which we are in both Germany and the US (admittedly too light in the shoes on the US side as we are long Healthcare and Energy, but short Tech and Consumer Discretionary).


That said, too light on Equities when the rest of the world wakes up to what we are really doing to world populations with trivial things like food inflation is definitely the place that the risk manager in me wants to be.


What are we (“some of them”) doing to most of them?


We’re starving them.


Now maybe Wall Street couldn’t give a damn about this. But I do. Here’s the data on world food prices (per the United Nations, not The Ber-nank):

  1. World Food Prices hit record ALL-TIME highs in December (on historical matters, ever is a long time).
  2. The commodities basket (55 commodities in the UN’s calculations to smooth out what’s “core”) has eclipsed the 2008 all-time high.
  3. Global grain production will have to rise at least 2% in 2011 to meet demand and avoid further depletion of stocks (UN agency).

The wizardry of the US Government’s calculation of inflation (CPI) is in the data as well. Ben Bernanke stares into the 60 Minutes cameras and does God’s work, under oath, saying that he didn’t see 2008 inflation with $150/oil or 2010 inflation with all-time record high world food prices. Charlatanism redefined.


When a professional politician or anyone who gets paid on inflationary terms tells you there is no inflation in the US, this is what they mean:


Top 6 Current US CPI Weighting:

  1. Housing: 41.96%
  2. Transportation: 16.69%
  3. Food and Beverage: 15.76%
  4. Recreation: 6.44%
  5. Medical Care: 6.51%
  6. Education and communication: 6.51%

*they’ve changed the CPI calculation 9x since 1996 (I wonder why)


So, obviously, the takeaway here is that Bernanke doesn’t see inflation because, like Hedgeye, he is bearish on US Housing. Unlike Hedgeye, he must think that the entire world works in NYC or Washington DC, where you don’t cook or drive to work.


Here’s another way to think about Global Inflation Accelerating and its impact on an interconnected global economy:


World Populations:

  1. China 1.341B people = 19.5%
  2. India 1.192B people = 17.3%
  3. USA 310M people = 4.5%
  4. Indonesia 237M people = 3.5%
  5. Brazil 190M people = 2.8%
  6. Pakistan 171M people = 2.5%

And across the world’s populations, here are this morning’s fresh off the Macro Grind global inflation reports for December:

  1. India food inflation reported at +18.32% year-over-year growth
  2. Russian inflation (CPI) hitting another new high at +8.7% DEC vs +8.1% NOV
  3. Kazakhstan inflation (CPI) +7.8% DEC vs +7.7% NOV
  4. Uruguay inflation (CPI) +6.93% DEC vs +6.87% NOV

I know – who cares about them people in Uruguay and Kazakhstan anyway. Nice trade Heli-Ben.


My immediate term support and resistance lines for the SP500 are now 1262 and 1284, respectively.


Trade inflation and roll the bones out there today,



Keith R. McCullough
Chief Executive Officer


Us vs. Them - Ben

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