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Prices Paid = Inflation

POSITION: long inflation


There are obviously a lot of ways to be long inflation (short bonds, emerging markets, or consumer stocks) or just run on out there and buy something that’s, well, inflating in price!


I can see how a Keynesian was right depressed when the chart below (ISM Prices Paid) hit its December 2008 low. That was the other side of the printing moneys from the heavens idea that created things like $150/oil. What goes up in terms of a government supported price, eventually comes down.


What’s been going up since December 2008 are the prices that business pay for stuff (+353%). If you don’t think that a manufacturer of something with copper or corn in it is feeling this chart, ask them.


We’ve long time predicted (2007-2008) that when reflation becomes inflation, that someone gets plugged. In this case, either consumers of end product are going to get it (McDonalds says they are going to raise prices – look how the market took that idea) or the fattened corporate margin is going to get it.


There’s a reason why inflation created a very bad margin environment in the 1970’s. There’s no reason why inflation can’t force corporate margins to mean revert from all-time highs either.


So when The Ber-nank tells you there is no inflation, remember this – if he didn’t see it in this chart in 2008, he sure as heck won’t see it now.


And that, folks, is why the US Dollar or the government policies that back it no longer have any credibility in global currency markets.



Keith R. McCullough
Chief Executive Officer


Prices Paid = Inflation - 3

R3: JCG, DKS, Social Media, and Egypt


February 1, 2010



  • Just a few days after Vera Wang’s collaboration with David’s Bridal was unveiled, the designer known for all things “wedding” is set to announce a partnership with Zale’s for wedding rings.  Now if only Kohl’s, David’s Bridal, Serta, and Zale’s would all collaborate to the put the head to home merchandise selection under one roof.
  • Another bullish forecast from the NRF, this time with a focus on Valentine’s Day.  Spending is forecast to increase 11% y/y, for an average spend per consumer of $116,21.  Overall, spending on Valentine’s should not be taken likely as the holiday is expected to generate $15.7 billion in sales.
  • Add Macy’s to the list of brands strategically using the pop-up store to promote a new fashion inititiave. In conjunction with the rollout of the company’s Impulse contemporary departments, the department store is opening a temporary boutique in Manhattan’s Flatiron district.  In addition, there is a major subway campaign underway promoting the youthful merchandising effort.



J. Crew Settlement With Investors -  J. Crew Group Inc.’s $10 million settlement of a an investor lawsuit over the proposed takeover by private-equity firms TPG Capital and Leonard Green & Partners LP has fallen apart, a lawyer for the shareholders said.  J. Crew officials undermined a deal in which the clothier agreed to extend the period to solicit competing offers to the $3 billion buyout bid, Stuart Grant, a lawyer for J. Crew shareholders objecting to the buyout, said in a court filing. The accord also included a $10 million payment to plaintiffs.  <Bloomberg>

Hedgeye Retail’s Take:  Perhaps a little more drama to come although it still remains unlikely that an additional bidder will step-up given the ample time that has already passed since the deal was originally announced.


Dick's SG to pay $15M to Settle Wage DisputesDick's Sporting Goods Inc agreed to pay up to $15 million to settle a number of class action lawsuits that had alleged a failure to pay overtime and other promised wages, according to a company filing with the U.S. Securities and Exchange Commission. The filing said that on Jan. 28, 2011, the company and attorneys for a group of plaintiffs filed a settlement agreement in the United States District Court for the Western District of New York to settle Tamara Barrus, et al. v. Dick's Sporting Goods, et al., and 22 related wage and hour class action lawsuits that have been pending against the Company and five individual defendants. <SportsOneSource>

Hedgeye Retail’s Take:  Add DKS to list of companies finally making whole on their overtime disputes.  This issue has been common across most of retail, with settlements occurring over the past several years.


Inflation in China Not Slowing Down Spending -  Wang Jung is a far more frugal shopper than the other female twentysomethings in her Beijing social circle of office workers. She balks at spending more than 150 yuan (about $23 at current exchange) on a single item of clothing, unless it’s a winter coat or shoes. Even then, she’ll spend hours combing the city’s hidden retail markets looking for the best deals. “I don’t see the point in spending 500 yuan [$76] on something I won’t be able to wear in a year because it’s not good quality,” she said, referring to big-name international retailers like Zara that have become go-to shopping destinations these days for Beijing’s young and fashionable. <WWD>

Hedgeye Retail’s Take:   The key difference in China being that wages are on the rise, which in turn is driving purchasing power increases.  Not so here in the US where inflation will likely put a damper on demand.


Upheaval in Egypt Hits Vendors -  The political crisis in Egypt is bringing commerce to a standstill, threatening to dampen consumer sentiment across the region, and forcing textile and apparel manufacturers to create contingency plans. Carrefour SA, the world’s second-largest retailer behind Wal-Mart Stores Inc., said rioters pillaged one of its five hypermarkets in Egypt, but it did not detail the scale of the damage. “The other stores are closed but did not suffer any damages,” a spokeswoman for the retailer said Monday. Carrefour is present in Egypt through its Middle East franchise partner Majid Al Futtaim, which also operates Carrefour stores in Jordan, Syria and United Arab Emirates, among other countries. <WWD>

Hedgeye Retail’s Take:  As far as publicly traded US companies go, Egypt related risk is pretty much a non-event. 


Japan Turns to Cheap Chic -  In Japan, the Baby Boomers have given way to the Bargain Bunch. Take Mayu Kawasaki, a 27-year-old retail manager from the southern Japanese city of Fukuoka, who is one careful shopper. “For me, number one is quality and design,” Kawasaki said. “I always want to find something that can be worn or used long term. And second is price, because fashion changes all the time. So if I can get cheap stuff, I don’t feel it’s a waste to use it only for the season.” <WWD>

Hedgeye Retail’s Take:   Given UNIQLO’s roots in Japan, fast fashion or cheap chic is hardly a new concept.  However, a stagnant economy could certainly be one reason why cheap fashion is picking up.


Where Are Social Media Marketers Seeing the Most Success? -  More companies in the Inc. 500 are using social media as part of their business and marketing strategies, and they are seeing success and viewing social media overall as more valuable. These firms, which include the fastest-growing private companies, have been using a mix of tactics, with Facebook as the most popular. According to a study released in January 2011 from the University of Massachusetts Dartmouth Center for Marketing Research, 71% of companies used Facebook in 2010, up from 61% in 2009. Twitter, at 59% in 2010, and blogging, at 50%, are also still high on the list.


Hedgeye Retail’s Take: Despite the progress, the question still lies with the “effectiveness” of such campaigns.


R3: JCG, DKS, Social Media, and Egypt - R3


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Notable news items/price action from the past twenty-four hours.

  • COSI traded strongly into the end of the session to close higher on accelerating volume along with KKD, WEN, JACK, PEET, and YUM.
  • GMCR, SBUX, and CBOU all underperformed as coffee prices continue to make headlines.
  • YUM’s KFC unit is embroiled in a lawsuit with franchisees over grilled versus fried chicken and a judge has decided that the franchisee council, “has the right to engage in a substantive planning, review and approval process”.
  • DRI’s share price gained yesterday, albeit on slowing volume, on the first day of their Investor Conference in Orlando.  Red Lobster and Olive Garden comps were strong. 
  • TXRH was downgraded to Market Perform from Outperform at Raymond James.  The stock declined on accelerating volume.



Howard Penney

Managing Director


The Macau Metro Monitor, February 1, 2011



Jan GGR hit 18.571BN MOP ($2.3BN USD), up 33.2% YoY.


Macau Transportation Infrastructure Office (GIT) said that it ‘must now suspend’ the Light Rail Transit process, following the injunction filed by Canadian manufacturer, Bombardier--one of the LRT bidders.  “While reviewing the tender documents of the other bidders we have found several issues that require further investigation,” Bombardier spokesman Marc Laforge said.


The Macau Government has not filed an appeal.  GIT said it will announce its next step “in due time,” but doesn't believe the injunction will have a great impact on the project, which was awarded to Mitsubishi Heavy Industries.



Stanley Ho's lawyer, Gordon Oldham, has released a recorded video that shows Dr. Ho saying he only suspended legal proceedings against several members of his family to give them a chance to reach a settlement that would return all the assets that he considered stolen, in order to resolve the brawl.  “I give everyone a chance. We call it a misunderstanding so we can start afresh. I want a fair division among my family. I still maintain equality," said Dr. Ho.

Staying On The Line

This note was originally published at 8am on January 27, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Someone has to stay on the line and say, no, we can do this by cutting spending and reducing the size of government.” 

-Chris Christie


Last night, Larry Kudlow had an outstanding interview with New Jersey Governor Chris Christie. For those of you who still care about this country’s currency and long term fiscal health, I think this is the most positive message we can find from a professional politician in America.


I’ll go through the abominations that are the US Federal Budget Deficit and Global Food Inflation in a minute, but first I want to recap what this American patriot is doing about it at the state level. Christie isn’t hiding behind “the depression” or “the deflation.” He doesn’t waste his time fear-mongering  and storytelling like Paul Krugman and Ben Bernanke either – he’s bellying up to the battle field, Staying On The Line, and fighting Big Government Spending:

  1. Cutting Spending – he’s cut 9% of NJ government spending (that’s year-over-year in US Dollars)
  2. Cutting Corporate Taxes – unlike Illinois, which loves commodity inflation and raising taxes
  3. Doing More With Less – his spending is smarter and he’s focused on doing a better job with less

Now we can surely have a debate about how screwed up NJ was relative to the rest of America (dropping the corporate tax rate in NJ takes Christie from the 50th highest state in the Union to #48), but the point here is that we have an American leader who isn’t giving political lip-service to being the change we all want to see in this country.


Delivering on political promises isn’t easy. That goes for operating in the asset management industry too. We’ve institutionalized and bureaucratized America’s corporate and government organizations in this country to a point where Staying On The Line and fighting the Fiat Fool headwind is actually quite hard to do. The self interest associated with personal job security in this environment often trumps long term planning and risk management.


So let’s consider the Captain of this country’s possum plan to cut the deficit by $400B over the next 10 years in the context of this massive entitlement of cheap US Dollars and Big Government Spending:

  1. Analytical Incompetence: The President of the United States’ spending cut plan was based on the wrong base of spending numbers. Immediately after the State of the Union address (where Obama loosely mentioned his $400B plan), the Congressional Budget Office (CBO) raised its 3-year budget deficit forecast by over $1 TRILLION dollars. Yes, $400B in cuts were planned using the wrong denominator of spending.
  2. Deficit Context: Understanding that competent forecasters like Hedgeye Risk Management were already predicting that the CBO’s estimates were 34% too low, this upward revision by the CBO made our estimates look light! Versus the CBO’s August, 2010 estimates (no, that wasn’t too long ago), yesterday’s $3.28 TRILLION 3-year US Budget Deficit forecast was +46% higher! Now you know why Peter Orszag left.
  3. Being off by a TRILLION matters to Global Markets: Yesterday, post the CBO revision and Bernanke’s FOMC statement pandering to the political wind, we saw the currency market press the Burning Bone to fresh 5-week lows and saw one heck of an inflation trade emerge across equity, commodity, and bond markets intraday.

Now some people think this is “all good” – if you’re short bonds like I am, I agree, inflation is good. If you’re long inflation oriented commodities and equities (Energy stocks (XLE) were up +2.4% and Basic Material stocks (XLB) were up +2.1% yesterday), that’s good too.


If you are the other HALF of Americans (155M people) who don’t have positions in any of this stuff (or HALF of the world’s population that depends on rice as their #1 food staple), well – you can just suck it up. By the way, the inverse correlation between the USD and Rice is currently -0.89%.


Some facts on Global Food Inflation trends from this morning’s headlines:

  1. The United Nations “strongly advises” not delaying food supplies to Egypt (whose stock market is down -10.3% this morning), Tunisia, Algeria, Morocco, Yemen, etc…
  2. Bangladesh (that’s another 150M people = the world’s 8th largest population), is DOUBLING rice imports this morning on “panic buying.”
  3. Turkey (72M people) is seeing short-term Turkish debt get hammered this morning on inflation concerns (2-year yields at 7.97%!).

Now why, in all the parameters of American self-interest, would it serve a long-only US-centric equity or commodity portfolio manager to agree with Ben Bernanke and the BLS (Bureau of Labor Statisitics) that there is no inflation?


That answer, and why the only reading in the free world that doesn’t see inflation (Bernanke’s), are pretty obvious…


But do we think that suspending inflation disbelief by using a conflicted and compromised US government person’s inflation calculation will have the unintended consequences associated with Global Inflation Accelerating cease to exist?


Maybe in the very short run…


And in the long run, Big Government Spending Keynesians will tell you we’ll “all be dead”…


“But we should arrange our earthly affairs, for the short run in which we have to live…” (Ludwig von Mises)


Finally, this morning in Davos, ECB Chief Jean-Claude Trichet admitted he’s not going to continue to be as willfully blind to the inflation as The Ber-nank. He told Bloomberg’s Francine Laqua that “we will do what is necessary… our credibility is based on that doctrine.”


Indeed, Mr. Trichet, indeed. The credibility of a nation’s currency depends on it.


And maybe that’s why the Euro continues to strengthen relative to the Debauched Dollar this morning. God knows their sovereign risks are at least as bad as Illinois’… but God also has real-time quotes and sees that the ECB doesn’t have ZERO percent interest rates. Nor does the ECB have the entrenched broken promise of an “independent” US Federal Reserve in lagging all of Asia and Europe from here in raising interest rates to fight inflation.


Whether it’s fighting this US Budget Deficit or the charlatan storytelling that blue-collar and unemployed Americans see no inflation, I salute those American patriots like Governor Chris Christie who are Staying On The Line.


My immediate-term support and resistance lines for the SP500 are now 1288 and 1300, respectively. For the 1st day since January 18th, I tilted the Hedgeye Portfolio back to the short side yesterday. We now have 9 LONGS and 10 SHORTS.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Staying On The Line - cbo

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