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Get your Bonds?

Position: Long Germany (EWG)


This week is a big one for European bond issuance.  Portugal, Spain, Italy, Netherlands, and Germany are preparing bond and bill sales worth as much as €42 billion ($54 billion) this week:


1.       Today: The Netherlands issued €3.5 billion of debt. 


2.       Tomorrow: Portugal plans to borrow as much as €1.25 billion, repayable in October 2014 and June 2020. Germany seeks €7 billion. 


3.       Thursday: Spain will auction as much as €3 billion of five-year bonds. Italy will market securities maturing in 2026 and 2015.


Portugal continues to be one country among the periphery that is getting the most attention due to its sovereign debt fears. The yield on the 10YR government bond is hovering just under the 7% line. As we show in the chart below, the 7% level has been a critical gravitational line. A mere 17 days after Greece broke through it on May 15, 2010 it received a €110 Billion bailout; whereas Ireland broke the line on 10/29/10 and received a bailout of €85 Billion on 11/29.


Get your Bonds? - neu


The focus now turns to the reception of Portugal’s issuance of €1.25 Billion tomorrow. Hanging in the balance is the country’s need to borrow €20 billion in bonds this year to finance its budget deficit and redemptions.


International Support


Bullish statements today from Japanese Finance Minister Yoshihiko Nado that his nation will use foreign-exchange reserves to buy “more than 20 percent” of bonds to be issued under a special assistance program for Ireland appear to be reducing yields across the periphery, including Portugal, over the short term.


Further, Japan’s insurance follows remarks from Chinese Vice Commerce Minister Gao Hucheng on January 5th in Madrid that China will buy Spanish public debt in the primary and secondary markets and a statement by Chinese Vice Premier Wang Qishan on December 21th that China had taken “concrete action” to help Europe with its debt problems.


While over the immediate term TRADE (3 weeks or less) these international actions could buoy peripheral bond prices, on the intermediate term TREND and long term TAIL we do not expect they’ll make a dent in arresting the risk premium to own the region’s sovereign debt imbalances. As the chart above also presents, even the bailouts of Greece and Ireland failed to arrest the expedient rise in yields.


Portugal’s Weak Economic Outlook


Today Bank of Portugal announced that GDP will shrink -1.3% in 2011 and expand +0.6% in 2012. Back on October 7th the bank had forecast no GDP growth in 2011, however the estimates did not include the austerity measures announced by the government on September 29th.


Those budget deficit reduction measures included:

  • Cutting public-sector wage by 5% for those earning more than €1,500/month
  • Freezing public-sector hiring
  • Raising VAT by 2% to 23%

With a budget deficit of 9.3% of GDP in 2009, the government has set a target of 4.6% for 2011, and aims to meet the EU deficit limit of 3% in 2012. However, the government’s 2011 deficit projection was based around a +0.2% GDP.


Portugal’s recessionary outlook (GDP has averaged less than 1% in the past decade), will compound the government’s ability to meet its deficit reduction aims as less revenue will be generated from tax payers. In an environment of rising bond yields alongside increasing investor fears, we caution that Portugal may suffer to issue and roll over debt this year, either through a lack of demand or exorbitant levels of interest that will force a Greece or Irish style bailout to meet its obligations.


As the EU and Eurozone lack a definitive mechanism to negotiate the sovereign default of member states and Eurocrats remain supportive of the Union in the name of job security, we may well soon see a Portuguese band aid bailout to cover up its fiscal mismanagement.


Matthew Hedrick



Get your Bonds? - EL Chart Debt

A LOOK BACK: Tough Love

A look back at a note we posted on February 24, 2010.






“Think not those faithful who praise all thy words and actions; but those who kindly reprove thy faults.”

This weekend I read a booked called "Nurture Shock", which outlines some new theories relating to raising children.  The first question one might ask, is why a 36-year old bachelor is spending weekends reading child psychology?  That is actually a pretty good question and I’m not sure I have an answer.  Regardless, the studies in the book appeal more broadly than to just parenting.  Specifically, there is one chapter that discusses praise and how to effectively use praise.  As I will outline, the insights from this chapter are broadly applicable to the work force and other interpersonal relationships.  Not to mention, quite interesting to a 36-year old bachelor!
To some extent, Socrates hit the proverbial nail on the head in his quote above, which is that we need to be very careful with praise.  Not only because there may be ulterior motives behind praise, but also because praise itself may be much less effective than we realize.  In "Nurture Shock", the authors open this chapter, which is called “The Inverse Power of Praise”, with the following quote:
“Sure, he’s special.  But new research suggests if you tell him that, you’ll ruin him. It’s a neurobiological fact.”
To this point, a survey conducted by Columbia University indicated that 85 percent of American parents think it is important to tell their kids they are smart.  Ironically, a number of recent studies suggest just the opposite, which is that telling your kid he or she is smart may be actually leading to underperformance.
Dr. Carol Dweck  studied fifth graders in New York City over a period of 10-years.  The kids were taken out of their classes and given a non-verbal IQ test consisting of a series of puzzles.   At the end of the IQ test, the kids were given a single line of praise.  They were told that they were “very smart at this” or they were told “they worked really hard”.  In effect, they were either praised for their innate intelligence, or praised for their effort and process.
In the next round of tests, the kids were given a choice of a set of harder tests or a set of easier tests.  They were told that they would learn a lot from the harder tests, but that they were definitely harder.  Almost 90% of the students that were complimented on their work ethic and process in the first round, chose the more challenging tests. Conversely, the majority of kids who were complimented for “being smart” chose the easier tests.  In effect, the “smart kids” took the easier path.
In the next round of tests, none of the kids had a choice and all the kids were given a more difficult test, which was designed for kids who were two years ahead of their grade level.  Not surprisingly, everyone failed the second, but the two groups responded very differently.  The group that was praised for their effort, and not their smarts, after the first round “got very involved, willing to try every solution to the puzzles.”  Conversely, the group that was praised for their smarts “were sweating and miserable.”  The results were astounding. The students that were praised for their effort on the first test improved by ~30% on their first score, while those that were praised for their smarts scored worse by ~20%.
In the follow up interviews, Dweck quickly determined the key variable.  Those students that believed success was based on innate intelligence, grossly discounted the impact of effort.  The reasoning was in effect, “I’m smart. I don’t need to put out effort.”  Dweck repeated this initial experiment and found that the results held true for every socioeconomic class and both males and females.
The irony of the results of this experiment, and many like it, are that its results are totally disregarded by many school systems and have been for years.  According to Dwek, since the early 1980s:
“Anything potentially damaging to a kids self esteem was axed.  Competition was frowned upon.  Soccer coaches stopped counting goals and handed trophies out to everyone.  Teachers threw out their red pencils.  Criticism was replaced with ubiquitous, even undeserved praise.”
Much of this self esteem movement was actually supported by studies.  In fact, from 1970 – 2000, there were over 15,000 scholarly studies on self esteem.
In 2003, the Association for Psychological Research asked Dr. Roy Baumeister to review this body of research.  Of the 15,000 studies, Baumeister  found that only 200 utilized a scientifically sound way to measure self esteem and its outcomes.  After reviewing those 200 studies in greater detail, Baumeister concluded that self esteem didn’t improve grades, career achievement or decrease alcohol usage.  Ironically up until that point Dr. Baumeister had been an advocate of the unadultered praise philosophy and called this study the biggest disappointment of his career.
Dweck’s work and others like it calls into question how we encourage our children, motivate our employees, and coach our players.  One fact that is increasingly clear, telling someone that they are “smart” or “great” merely to boost their confidence will likely have an adverse impact on their actual performance.  The key is to encourage the process or actions that will lead to the successful outcome.
As the old saying goes, “Hard work beats talent when talent doesn’t work hard.” That is of course especially true when the talent is only a mirage created by ill advised attempts to promote self esteem.
Is not being full of praise for your kids tough love? Maybe, but a little tough love may actually going a lot way towards their future success.
Daryl G. Jones
Managing Director


Restaurant sales results and presentations are ongoing; here is a look at yesterday’s price moves and news items.

  • CAKE released sales this morning ahead of their presentation at the Cowen Conference today.  The Q4 comp result for The Cheesecake Factory and Grand Lux Café increased 0.9% in Q4.  Given that the company grew traffic for the fourth consecutive quarter, and there is roughly 1.5% of price on the menu, it seems that CAKE’s average check problem has not gone away.
  • CAKE reaffirmed 2011 guidance of annual comp sales up 1%-3% and 6-9 new restaurants.
  • RUTH outperformed the space yesterday, gaining on strong Q4 sales results that were released yesterday including comps of +9.2%
  • Overall, the strong relative outperformance continues into 2011
  • Chains focused on the higher end customers and the business traveler continue to show the best trends (RUTH and MRT.  Also in retail TIF posting good numbers today)
  • COSI corrected after a strong first week to the year
  • MCD declined on strong volume.  I retain my bearish view for MCD in 2011 and am holding a conference call with clients to go over the fine details on Friday at 11am.  Email for details.



Howard Penney

Managing Director

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The Macau Metro Monitor, January 11, 2011



“If somebody else builds on [parcels] 7 and 8, I will be happy. Happier than if I were going to build on it because it will create more critical mass for Cotai," LVS CEO Adelson said.  He added that it will take Sands ~1.5yrs to complete parcels 5 & 6.  Afterwards, the company will start developing parcel 3, which will take ~3yrs.


Commenting on Galaxy Macau, Adelson recalled, “Galaxy has already been on Cotai for the last four years" with Grand Waldo, saying the company hasn’t been very successful there.  “I am not that excited about them contributing so much to the growth of Cotai because they are not themselves good operators,” he added, saying that most of Galaxy’s gaming operations are currently in the hands of third parties.


Adelson stressed that Sands China wouldn’t actively chase more direct VIP business, focusing instead on improving relationships with VIP operators, unlike what was previously being done by former Sands China CEO, Steve Jacobs.



The Government saw a net increase in betting tax and GST revenue of S$420MM with the entry of the two Integrated Resorts between April and November 2010.  In that same period, total casino entry levies collected by the Totalisator Board (Tote Board) increased S$130MM.


Second Minister for Finance Lim Hwee Hua said, "While the IRs have brought in new revenues, collections from other gaming activities such as lotteries, horse and sports betting and fruit machines operated by clubs have fallen."


Revenues collected by the Government from the IRs will flow into the Consolidated Fund.

CHART OF THE DAY: The Long Walk of European Debt Maturities


CHART OF THE DAY: The Long Walk of European Debt Maturities -  chart of the day

Long Walks

“It is odd to reflect that the prime advocate of a classless society had this early succeeded in making two classes of workers and in marking the difference so clearly with substantial rewards to one class.”

-Slavomir Rawicz


For those of you haven’t read Salovmir Rawicz’s book, The Long Walk, it is well worth your time.  The book tells the story of the author and six fellow prisoners who escape a Soviet labor camp in Yakutsk in 1941. The escapees travel over 4,000 miles through the Gobi Desert, Tibet, and the Himalayas to finally reach British India, and their freedom, in the winter of 1942. 


Last week I surveyed our team for their top book recommendations for 2011 and this book was recommended to me by our newly hired Managing Director of New Business Development, Bob Brooke.  After a brief description of the book, Bob ended his note with the apt, “Hard work is easy.”  In the context of an escape from a Soviet labor camp in Siberia, Bob’s point is a fair one.  Our daily grind through the global markets is certainly easy in comparison to the struggles many on this planet face every day.


On that note, I would like to officially welcome Bob to the Hedgeye team.  After obtaining a degree in economics from Yale, Bob went on to an illustrious professional hockey career, which began playing with the U.S. Olympic Hockey Team in Sarajevo and then tours of duty with the New York Rangers, Minnesota North Stars, and New Jersey Devils.   Bob then went on to get his MBA from Harvard and has spent the last few decades working and building businesses at CSFB, RBC Capital Markets, and Sanford Bernstein.  At Hedgeye, he will be leading many of our new business initiatives and he can be reached at .  


The reason I highlighted Rawicz’s quote above, versus the many noteworthy quotes in the book, is because it emphsaizes the power of free markets.  The Soviet authorities needed cross country skis and in order to find the prisoners who had ski making skills, they had to offer increased pay, which in the case of a Soviet labor camp was nothing more than a doubling of rations.  Incentives are at the very foundation of free market systems.  While the Soviets could easily have used coercive incentives, they opted to use higher remuneration for what they perceived as a more critical skill set (that of ski making). 


Interestingly, incentives on an individual basis are often quite successful, but where they often fail is at the nation state level.  As we survey the global macro landscape, the key issue currently is sovereign debt in Europe.  While European debt concerns took a respite at the end of last year, they are again front and center, and rightfully so.  In the Chart of the Day below, we’ve highlighted some key debt maturities in Europe in 2011. Broadly, there are massive refinancing needs in Europe this year, highlighted by Italy and Spain.  It will be interesting to see if certain nations within Europe can be incentivized to get their fiscal houses in order in the coming year.


The Long Walk of Sovereign Debt is, of course, not limited to Europe.  In fact, CMA recently released its Q4 Sovereign Debt Credit Risk Report and highlighted its view of the top 5 riskiest countries, which were:

  1. Greece - $330BN in 2009 GDP
  2. Venezuela - $337BN in 2009 GDP
  3. Ireland - $227BN in 2009 GDP
  4. Portugal - $227BN in 2009 GDP
  5. Argentina - $310BN in 2009 GDP

The collective GDP of these highest at risk countries is $1.4 trillion, which in aggregate would make them the 10th largest country by economic output in the world (just ahead of Canada).  So, while on an individual basis these countries may have little impact, in aggregate they matter big time.


Beyond these hot spots, the key economies to watch in coming months will be Italy, the seventh largest economy in the world with a GDP of $2.1 trillion, and Spain, the ninth largest economy in the world with a GDP of $1.5 trillion.  The CDS market for both these nations is flashing Default Danger as Spanish 5-year CDS is trading at 359 basis points and Italian 5-year CDS is trading at 256 basis points.  This is up 237% year-over-year for Spain and 180% year-over-year for Italy . . .


As it relates to the calendar, The Long Walk of Sovereign Debt begins this week with the following auctions:


1.       Today: The Netherlands is pitching about 3.5 billion euros of debt. 


2.       Tomorrow: Portugal plans to borrow as much as 1.25 billion euros, repayable in October 2014 and June 2020. Germany seeking 7 billion euros. 


3.       Thursday: Spain will auction as much as 3 billion euros of five-year bonds. Italy will market securities maturing in 2026 and 2015.


As always, the market will ultimately be the arbiter in the coming days, weeks, and months as to whether Europe can survive The Long Walk of Sovereign Debt.


Yours in risk management,


Daryl G. Jones


Long Walks - EL Chart Debt 

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