CHART OF THE DAY: Accountability A'Cometh for the Keynesian Kingdom?



CHART OF THE DAY: Accountability A'Cometh for the Keynesian Kingdom? -  chart

The Fiat Flock

This note was originally published at 8am on April 05, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“They would be our shepherds, and we are to be their flock.”

-Frederic Bastiat


After watching Maria Bartiromo interview Chicago Federal Reserve Bank President Charles Evans yesterday into the market close and then watching The Bernank shepherd the financial media into taking his word for it on The Inflation last night, I thought about becoming a sheep.


Or should I rethink my being in this interconnected Global Macro game of risk as a lemming? Perhaps a monkey? Or a donkey? Ah, so many attractive career options are available if I were to accept the wishes of the overlords of the Keynesian Kingdom and become a member of The Fiat Flock


Born in France in 1801, then orphaned at the age of 9, Bastiat penned the aforementioned quote when he wrote “The Law” in 1850. Not surprisingly, his work wasn’t well regarded by the French Socialists of his time. Neither was it promoted by Charles de Gaulle in the 1950s when his debt-financed-deficit-spending and devaluation programs destroyed both the franc and French credibility in global markets…


During days when the General-in-Chief of the US Federal Reserve (Bernanke) is more left leaning and socialist than the ex-Finance Minister of France turned head of the European Central Bank (Trichet), I think it’s worth taking a moment this morning to consider America’s constitutional definition of liberty as an alternative to this wanna be Centrally Planned world.


The Bastiat Questions (“The Law”, page 46):


“The pretensions of organizers suggest another question, which I have often asked them, and to which I am not aware that I have ever received an answer: Since the natural tendencies of mankind are so bad that it is not safe to allow liberty, how comes it to pass that the tendencies of the organizers are always good? Do they consider that they are composed of different materials from the rest of mankind?”


The Implied Answer (“The Law”, page 46):


“They have, therefore, received from heaven, intelligence and virtues that place them beyond and above mankind: let them show their title to this superiority. They would be our shepherds, and we are to be their flock.”


So how do you feel about that? How do you feel about American central planners debauching the longstanding entitlement we’ve had to the definition of a “free market” system? What’s so free about a market whose every breath of weaning volume depends on The Bernank’s heavy hand?


It’s sad to watch.


Back to this morning’s Global Macro Grind


The Top 3 headlines this morning are:

  1. “UConn beats Butler for the National Championship”
  2. “Texas Instruments To Buy National Semiconductor”
  3. “Bernanke Says Fed Must Monitor Inflation Extremely Closely.”

Great news for UConn and National Semi – but what’s up with The Bernank? What exactly does monitoring inflation “extremely closely” mean? Were our shepherds monitoring The Inflation somewhat closely before food prices hit all-time highs?


I don’t know how else to say it, so I’ll say it like the Chinese just did this morning by addressing The Inflation head on and raising China’s benchmark interest rate. If we’re not going to address reality about oil at $108/barrel, a new leader in the global financial system will. Don’t think for a New York minute that China didn’t do this in Bernanke’s face this morning for a reason.


China waited on Ben Bernanke’s speech to The Fiat Flock in Georgia last night. This what he said:


“So long as inflation expectations remain stable and well anchored… the increase in inflation will be transitory”


No, dear hard working red-white-and-blue-collared Americans, I couldn’t make that quote up if I tried. Yes, Bernanke makes up his own “forecasts” about matters like growth and inflation all of the time – and, yes, his forecasting track record speaks for itself. It’s terrible.


On Growth:

  1. Bernanke is still forecasting 2011 US GDP growth of 4% to Infinity and Beyond…
  2. The Street, including both Goldman and Bank of America, is cutting GDP growth estimates closer to the Hedgeye estimate

On Inflation:

  1. Bernanke calls inflation expectations well anchored and prices “stable”
  2. The Market, including Commodity and Volatility prices, is flashing the highest food prices and gyrations in price volatility, ever…

As we like to say at Hedgeye, Mr. Bernanke, ever is a long time…


There has never been a Federal Reserve Chairman who has overseen more Americans on food stamps (44 million people and counting). There has never been a Federal Reserve Chairman who has overseen 3-week explosions of price volatility (VIX) on the order of +40-60%, and then draw downs to higher-lows that are the most expedited in market history (7 days in March = VIX down -41.6%).


We are not your Fiat Flock. We do not trust your “forecasts.” And we want our markets back.


My immediate-term support and resistance lines for WTI Crude Oil are $105.91 and $108.92, respectively. My immediate-term support and resistance lines for the SP500 are now 1318 and 1341, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Fiat Flock - Chart of the Day


The Fiat Flock - Virtual Portfolio


TODAY’S S&P 500 SET-UP - April 8, 2011

Both China and Europe raise interest rates this week; Chinese and European stocks both rallied on the decision.  China, which is the country we like most on the long side right now was up for the 3three consecutive following the rate hike to +7.9% YTD.  As we look at today’s set up for the S&P 500, the range is 31 points or -1.61% downside to 1312 and 0.71% upside to 1343.




We are on DAY 5 of perfect with 9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND. 


THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: -758 (-1178)  
  • VOLUME: NYSE 907.05 (+2.43%)
  • VIX:  16.90 -2.87% YTD PERFORMANCE: -4.79%
  • SPX PUT/CALL RATIO: 1.93 from 1.48 (+30.35%)



Treasuries fell, sending 10-year yield to 3.57%, as traders added to bets on inflation, Fed Bank of Richmond President Jeffrey Lacker said may raise interest rates this year. 

  • TED SPREAD: 25.40
  • 3-MONTH T-BILL YIELD: 0.04% -0.02%
  • 10-Year: 3.58 from 3.56
  • YIELD CURVE: 2.71 from 2.66


  • 8 a.m.: Fed’s Lockhart to speak in Knoxville, Tenn.
  • 8:30 a.m.: WASDE grains
  • 10 a.m.: Wholesale inventories, est. 1.0%, prior 1.1%
  • 10:15 a.m.: Fed’s Fisher speaks in Dallas to business writers
  • 1 p.m.: Baker Hughes rig count 


  • Royal Bank of Canada has gotten expressions of interest to buy or merge its US operations - Globe and Mail (C$60.29)
  • Moody’s downgraded covered bonds issued by Portuguese banks including Banco BPI, Banco Comercial Portugues and Banco Espirito Santo following the April 6 cut in the lenders’ ratings.
  • Petrobras Discovers More Evidence of Oil in Offshore Lula Field
  • Disney, partners break ground on Shanghai Disney resort
  • Fed reports balance sheet assets of $2.65T on Wednesday, +$26.2B w/w and +$341.9B y/y
  • CNBC reports that AIG submitted some of the winning bids in yesterday's Federal Reserve auction of Maiden Lane II bonds
  • Expedia (EXPE) to split into two by separating TripAdvisor unit into publicly traded company



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Commodities Rise for Seventh Day to Two-Year High, Led by Cotton, Silver
  • Copper Rises to One-Month High in London on Growth Outlook: LME Preview
  • Gold Jumps to All-Time High on Concern About Inflation, Weakening Dollar
  • U.S. Corn Supply Shrinking as Meat, Ethanol Demand Send Crop Price Higher
  • Thailand’s Rice Bowl May Get Smaller as Farmers Curb Output to Spur Prices
  • Oil Rises to 30-Month High Above $111 in New York, $124 in London on Libya
  • Sugar Rises for a Second Day on Supply Speculation; Cocoa Prices Decline
  • Japan To Restrict Rice Planting in Fukushima After Testing for Radiation
  • Wheat Imports to China Will Drop as Drought Ebbs, Analyst Says After Tour
  • India’s Commodity Futures Market to Grow 25%, Express Says, Citing Khatua
  • Quake Lifts U.S. Diesel Cargoes on Three-Month High Profit: Energy Markets
  • Equinox Says Minmetals' $6.3 Billion Offer Is ‘Lowball,’ Understates Value
  • Sugar May Drop Next Week on Rising Supply From Brazil, India, Survey Shows


  • Yen fell after crippled Fukushima nuclear plant escaped damage from the biggest earthquake to strike Japan since March 11.
  • Pound at the strongest level since January 2010.

THE HEDGEYE DAILY OUTLOOK - daily currency view



  • Rate hikes work! European market are broadly higher today.
  • UK Mar Core PPI +3.00% y/y vs consensus +2.90% and prior +3.10%; UK Mar Core PPI +0.40% m/m vs consensus +0.30% and prior +0.10%%.







  • Japan and China lead Asia higher.  India, Thailand and Malaysia were the outliers on the downside.
  • Japan February current account surplus +3.0% y/y to ¥1.641T vs cons ¥1.704T.













Howard Penney

Managing Director

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 78.34%

Retail: Sell The Strength


Overall, there’s probably not many analysts/PMs out there who are short/underweight Retail that are not scratching their heads wondering what they’re missing, and why today’s sales are so strong.  If they’re not asking that, then they’re being intellectually dishonest.


We’ve spent the past few hours debating, crunching, and thinking about what all this means. And at the end of the day, we’re sticking to our guns that retail will roll meaningfully in 2H (actually, with margin pressure becoming apparent in June).


Yes, there was definitely an overwhelmingly high number of beats relative to expectations. But there’s a lot of factors at play…

1)      Sample size: Let’s not forget that over the past year, the number of companies represented in the sample went from 33 to 23 – and because one of those companies is Wal-Mart, we’ve seen $260bn in revenue go silent. Look at it this way, we have a $14 trillion economy with a 73% consumption rate – so about $10.2 trillion in PCE. Wal-Mart’s US sales account for about 2.6% of that. Better yet, WMT accounts for 7.1% of all dollars deployed at retail in the US.  

2)      Target didn’t exactly knock the cover off the ball. It beat expectations by 90bps, but still printed a (-5.5%) comp, as strength in consumables and Home was offset by weakness in/mix shift away from apparel and footwear.

3)      COST continues to confirm our view on inflation with both fresh foods and food and sundries still up in the LSD range while meat and produce increased reflecting MSD inflation. In addition, gas contributed +3% and +7.5% to SSS for both COST and BJ respectively. Our view is that while this won’t be the first or second crack in the retail industry’s margin equation, it will add to the pain as the retailers choose to capture consumables inflation costs at the expense of discretionary product margins. (i.e can’t take up price on milk, eggs, and chicken – so look to extract margin in categories like underwear, shirts, toys, etc…).

4)      There’s no doubt that higher-end products and brands are outperforming. Not a shocker. JCP -0.3, Macy’s +0.9%, Nordstrom +5.1%, and Saks +11.1%. This is definitely a positive for Ralph, and to a lesser extent Guess and PVH.

5)      Mesh that with another major undisputable fact…after drawing working capital down to the lowest level in the history of modern day retail, we need to start to see inventory flow into – and then out of – the system in order to allow any of these companies to grow sales. I don’t think anyone would dispute that Gross Margin variability is headed higher – but companies won’t talk about that when their most important month of the quarter is left to go.  While this will be more of an issue in 2H, it is likely to be a factor this quarter as well.


So now what?  

We’ve got another month of meaningful acceleration in sales. Who’s going to short retail after we saw a seemingly inexplainably strong March, and should see a better than 1,000bp ramp in April? Well… I might. But then in May we get the deceleration and it is on product that has a higher cost embedded in the margin. Then a month later the consumer runs out of QE2 support. Our financials analyst, Josh Steiner, noted this morning to clients how history shows that the end of any period of quantitative easing  has put the brakes on improvement to the employment picture for an average of 5-6 months. We have no reason to think it will be different this time around.


That means that we either need wage improvement to drive income, which we’re not going to bank on.


That leaves us with two remaining levers to boost personal consumption – taxes and savings rate.  Taxes are sitting at about 9.5% now, one of the lowest levels on record. Yes, that sounds so low, and most people reading this wish they could have this rate. But math is math. Even if you argue that the government understates the tax numbers (why not? They have no problem misrepresent other numbers – like the CPI ) at least give them the benefit of the doubt that they consistently misrepresent it. The latest trajectory is near trough, and it’s probably not going any lower.


If there’s one area where we think we could be wrong, it’s with the personal savings rate. It’s crept up to 5.6% from close to zero over the past few years, and this is a direct trade-off with consumption.  Could the consumer draw down savings in 2H and be sitting there with no savings, but still be spending? Yes. We’re Americans. That’s what we do. But the savings rate came down over time as interest rates came down, which has obvious implications for purchasing power. With rates today sitting near zero, it scares me to think of what the consumer environment will be later this year if we’re right with our thesis, and the consumer draws down savings back towards zero while interest rates have nowhere to go but up.


I work in an office of hockey heads. But I think the scenario I just described is like ‘pulling the goalie.’


For all these reasons, I’m a seller into strength over the next two months. Favorites include LIZ, PSS, FL, ROST, RL.  Least Favorites: WMT, TGT, CRI, JNY, JCP.


Retail: Sell The Strength - PCE SS 3 11 2


Additional SSS Callouts:

  • The strongest performing categories were food/grocery (TGT, COST), women’s and men’s apparel (KSS, COST), and home (ROST, KSS, TGT). On the contrary, softness in footwear was highlighted by several retailers (KSS and TGT) given its sensitivity to the Easter shift.
  • Weekly trends were consistently stronger throughout the month with the weakest results in week 5 due to the Easter shift.  The one notable exception is COST, which realized a +1-2% benefit from the shift and extra day in March compared to the rest of companies that expect the tailwind in April.
  • Given the importance of April to Q1 results, there were few changes to corporate Q1 outlooks with three exceptions: 1) Macy’s, which increased its April comp outlook following stronger than expected March sales and a tailwind of both shift and a planned cosmetics promotion; 2) ROST, which expects to come in ‘somewhat above’ initial Q1 EPS guidance; and 3) Gap, which took Q1 EPS down by $0.04 to reflect events in Japan.
  • COST continues to confirm our view on inflation with both fresh foods and food and sundries still up in the LSD range while meat and produce increased reflecting MSD inflation. In addition, gas contributed +3% and +7.5% to SSS for both COST and BJ respectively.
  • JCP noted that inventories remain in-line with expected sales trends, though they did sneak in that they saw higher volume of clearance merchandise – suggesting possible margin pressure. They did comment, however, that the Liz Claiborne product is performing ‘exceptionally well.’
  • Consistent with recent results, ROST highlighted that pack-a-way still accounts for roughly 47% of total inventories while consolidated inventories increased 35% up from 27% in February. We continue to expect that higher pack-a-way to provide a margin benefit in the 2H.
  • From a regional perspective, performance was strongest in the Southeast and SoCal (COST, BJ, KSS, TJX, TGT) and weakest in the Northeast (GPS, TGT, TJX).

Retail: Sell The Strength - SSS Total 4 11


Retail: Sell The Strength - SSS Cat 1Yr 4 11


Retail: Sell The Strength - SSS Cat 2Yr 4 11





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