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Federal Deficit Update: Is the United States Knock, Knock, Knocking on Bankruptcy’s Door?

“Mama take this badge from me, I can’t use it anymore,

It’s getting dark, too dark to see.”

-Guns N’ Roses, “Knocking on Heaven’s Door”

 

Conclusion:  Could the United States really go bankrupt? No, not as long as she can print money. That said, the recently reported six month deficit number was -$831BN.  This is not positive for the U.S. dollar.

 

The Department of Treasury recently reported the U.S. Federal government budget deficit for March at $-189BN.  This was $124BN more than the deficit in March of last year, though this incorporates a restatement of $115BN related to TARP for March 2010.  According to the CBO:

 

“Specifically, the Treasury reported a reduction for that program of $115BN in March 2010, reflecting a significant decline in its estimated net costs.”

 

So, it seems that Treasury overstated the cost of TARP, by $100BN+, which is at face value positive, but if TARP is a 1-time expenditure, why then is this month’s deficit $124BN more than last March if neither month incorporates TARP spending? Did the U.S. federal deficit really grow 186% year-over-year?  Well, according the CBO, whose numbers we’ve outlined in the table below, the answer is yes.

 

Federal Deficit Update: Is the United States Knock, Knock, Knocking on Bankruptcy’s Door? - 1

 

Setting aside the TARP adjustment, year-over-year growth in the deficit for March still grew 3.2% year-over-year.   The key drivers on the spending side of the equation include $3BN more spending on Medicare, $3BN more in net interest on public debt, $2BN more in social security, and $2BN more in education.

 

In the year-to-date, the deficit numbers are as dismal as the monthly numbers.  The preliminary deficit for the first 6 months of the fiscal year was $-830BN, which is a $113BN increase versus the same period last year.   While revenues were up $66BN year-over-year, expenditures by the Federal Government were up an amazing $179BN. 

 

Once again, though, the Treasury Department offers us adjusted numbers for the full year, which suggest that expenditures only grew by 1% year-over-year if we add back the adjustment for TARP.  Although, interestingly, in its analysis the CBO actually does not back out spending from ARRA (American Recovery and Reinvestment Act) in 2010, which was $30BN in the comparable period. 

 

In the table below, we’ve simply laid out key expenditure line items and their year-over-year rate of change.  For purposes of this analysis, we left out the historical adjustments to TARP.  Every single line item grew on a year-over-year basis except unemployment.  Not exactly great cost containment by the Federal Government in the first six months of this fiscal year.

 

Federal Deficit Update: Is the United States Knock, Knock, Knocking on Bankruptcy’s Door? - 2

 

In the last chart below, we’ve shown the monthly U.S. federal deficit numbers going back three years.  This chart is about as ugly as it gets for the fiscal outlook of a country.   In the last 36 months, the U.S. federal government has run a deficit in 33 of 36 months.   Clearly, if those were the cash flows of a company, it would have been in bankruptcy protection months, if not years, ago.

 

Daryl G. Jones

Managing Director

 

Federal Deficit Update: Is the United States Knock, Knock, Knocking on Bankruptcy’s Door? - 3


TALES OF THE TAPE: CBOU, CMG, BWLD, DIN, DRI, COSI, CBRL, BWLD

Notable news items and price action from yesterday, including our fundamental view on select names.

  • CBOU was reiterated “Buy” at Jeffries.
  • CMG is facing some heat in the media this morning as fired workers allege the burrito chain was soft on immigration, with many managers allegedly having been told explicitly that papers were falsified. 
  • CMG has unveiled additional details for its new restaurant concept open this summer.  ShopHouse Southeast Asian Kitchen is inspired by the traditional shophouses found throughout Thailand, Malaysia, and Vietnam.
  • BWLD has launched a redesigned menu that encourages guests to mix and match food selections with the chain’s signature sauces.  The menu also features 10 new items.
  • Casual dining companies are struggling in the battle to identify underage drinkers.  The recent scandal surrounding an Applebee’s in Michigan serving a toddler alcohol does not appear to have been an isolated incident.  An Applebee’s in California made the same mistake (different toddler) in 2007 and, according to media reports out today, a Florida youngster was served sangria during a visit to an Olive Garden restaurant.
  • COSI gained 4% on strong volume yesterday.
  • CBRL and BWLD gained on strong volume yesterday.  Oil prices declining sharply was a strong positive for CBRL.

TALES OF THE TAPE: CBOU, CMG, BWLD, DIN, DRI, COSI, CBRL, BWLD - stocks 413

 

Howard Penney

Managing Director


THE M3: GST TAX INCREASE UNLIKELY; TAIWAN

The Macau Metro Monitor, April 13, 2011

 

 

PM LEE, WILL GST INCREASE AFTER GE? Channel News Asia

S'pore Prime Minister Lee Hsien Loong does not think there will be a hike in the Goods and Services Tax.  "I very much doubt that, unless we go wild in our spending plans and of course we'll run out of money and then you'll have to raise the GST.  But if we have prudent budgets and we're careful in our plans and if we grow the economy, I think we should be in good shape."

 

PM Lee also mentioned that the government will invest carefully, with returns going towards funding programs such as the S$3BN Grow and Share package.  Under the package, households will receive S$3,000 to S$4,000 this year, depending on the household income.

 

TAIWAN CASINOS TO AFFECT MACAU IN 'MEDIUM TERM Macau Daily Times

Chief gaming regulator Manuel Joaquim das Neves said that in the short term (5 years), he doesn't see much impact from the opening of casinos in Taiwan on the Macau gaming sector, but it could be a very different story in the medium term.  Neves also said the new smoking law could see some gamblers look elsewhere.


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America's Last Entitlement

This note was originally published at 8am on April 08, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The best way to destroy the capitalist system is to debauch the currency.” 

-John Maynard Keynes

 

What’s worse right now, American fiscal or monetary policy? Sadly, that’s a tough call. As the world embraces the idea of a US Government Shutdown this morning (yes, many of us would like to see these people stop what they are doing), even John Maynard Keynes is rolling over in his grave. The US Dollar Index is trading down at fresh YTD lows of $75.14.

 

Let’s take a look at both sides of what drives a country to “debauch the currency” (looking at Europe vs USA, straight up) and the immediate-to-long-term risk management implications for your portfolios:

 

1. Monetary Policy

 

As anyone who has traded a currency market in the last 40 years knows, currencies trade not only on the direction of a country’s monetary policy (hawkish or dovish), but relative to other countries with competing policy views.

 

For the 1st time in 40 years, the Europeans raised interest rates before Americans did yesterday. Notwithstanding the colossal failure of common sense associated with The Bernank opting to starve the American common man with inflation and a zero percent return on his savings account, it’s important to recall that Trichet’s rate hike didn’t come from the zero bound. He was already at 1% and he moved to 1.25%. That’s bullish for Euros versus Dollars.

 

In justifying the interest rate hike, the ex-Finance Minister of France told the world, “You know from our own doctrine that we always do what is necessary to deliver price stability.” In the immediate-term, even for the left-leaning Frenchman, that is pseudo-true. Relative to The Bernank, it’s very true. With the USD down for 11 of the last 15 weeks, Bernanke is perpetuating the highest PRICE VOLATILITY that commodity markets have ever seen.

 

2. Fiscal Policy

 

On a relative basis versus Europe, particularly relative to the United Kingdom, the United States of America isn’t even in the area code of where capital market winds have blown European politicians. Since many European markets can’t mark-their-bonds-to-model like Geithner and Bernanke have attempted to mark US Treasuries, austerity measures have either been imposed by popular vote (UK) or by market vote (Portugal). Both votes count.

 

Many Americans have found rhetorical resolve in calling Europeans “pigs”, and that might feel all good and fine if you’re an American living large on a banking fee or a Washington retainer, but that doesn’t change the reality of what the rest of the world rightly started calling Boehner and Reid this week – donkeys.

 

While the “audacity” of President Obama’s “hope” is clearly not an investment process that global currency markets are long of (to the contrary, the largest short position in US Dollars, ever, implies the world is betting against the 112th Congress in size), an earthshaking culture shock to the Big Government Spending model is the only thing Americans can hope for.

 

3. Long Dollar, Short Euro, Short Commodities?

 

That would be the most contrarian (and least profitable) call you could have made in the first 3 months of 2011. And that’s exactly why you should be asking yourself if The People can govern the government as the US Constitution asks them to. Betting against professional politicians of a centrally planned state is easy – betting against the common sense of the sometimes Forgotten Man (Amity Schlaes) in America is a losers’ long-term bet.

 

I think my defense partner, Daryl Jones, asked the most contrarian question on US Fiscal Policy yesterday that you can ask yourself right now, “Could The Ryan Budget Be The Most Economically Bullish Legislation of Our Lifetimes?” (send us an email if you’d like a copy, sales@hedgeye.com)

 

This isn’t a partisan point. Remember, I am Canadian – and I edit Big Alberta’s work. If a Democrat or a talking monkey were to put a legitimate spending cut bill on the floor we’d be asking the same question. I really don’t care what it takes, or who sponsors it – arresting the Debauchery of the US Dollar has become a national security issue for America’s standard of living.

 

You don’t have to take my word for it on what happens when you burn your currency at the stake. History is littered with examples. This is not the best long-term path to prosperity. If you are a raging Republican or a dogmatic Democrat who has supported Big Government Intervention for the last decade, all you need to do is take the Keynesian Kingdom call on this from John Maynard Keynes himself – “The best way to destroy the capitalist system is to debauch the currency.”

 

If you’re really long The Inflation this morning (LONG: oil, gold, etc; SHORT: dollars, US Treasuries, etc), this idea of combining fiscal and monetary conservatism should scare the hell out of you. When you consider that The Bernank has not only perpetuated unprecedented Price Volatility AND the largest NET-LONG position that the hedge fund industry has EVER had in commodities – you should be afraid, very afraid. I am.

 

But we are all big boys and girls managing risk out here on the Global Macro gridiron, so suck it up, take a deep breath, and pray. Because, at a new all-time record high price for Gold this morning of $1470/oz and $111.56/barrel oil, there’s a new bubble in town – the bubble of America’s Last Entitlement. Cheap money and donkey politicians won’t last forever.

 

My immediate-term support and resistance lines for oil are now $107.16 and $111.59, respectively. My immediate-term support and resistance lines for the SP500 are 1312 and 1343, respectively.

 

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

KM

 

Keith R. McCullough
Chief Executive Officer

 

America's Last Entitlement - Chart of the Day

 

America's Last Entitlement - Virtual Portfolio


CHART OF THE DAY: Beta Chasing Will Eventually Leave a Mark

 

 

CHART OF THE DAY: Beta Chasing Will Eventually Leave a Mark -  chart


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - April 13, 2011

 

China continues to trade higher, up another +0.96% last night to +8.6% YTD (almost 2x the YTD SP500 return, unadjusted for Burning Bucks) leading what continues to be an improving Asian equity picture (ex-Japan).  As global growth slows, unlevered Chinese growth becomes more valuable.

 

After being bearish/short China in 2010, we’re long now and will focus 1/3 of our Q2 Macro Theme presentation (Friday) on the why.  As we look at today’s set up for the S&P 500, the range is 18 points or -0.32% downside to 1310 and 1.05% upside to 1328.

 

SECTOR AND GLOBAL PERFORMANCE

 

Two more sectors broke trade yesterday; Energy and Technology.  We now have 6 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.    

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING GLOBAL

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING GLOBAL

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -1498 (-318)  
  • VOLUME: NYSE 949.53 (+15.98%)
  • VIX:  17.09 +3.10% YTD PERFORMANCE: -3.72%
  • SPX PUT/CALL RATIO: 1.50 from 1.37 (+9.26%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 23.51
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 3.52 from 3.59
  • YIELD CURVE: 2.75 from 2.74 

 

MACRO DATA POINTS:

  • MBA mortgage applications index fell for third week, declining 6.7% week ended April 8 to lowest in 2 months; Refis down 7.7%; Purchases drop 4.7%
  • 8:30 a.m.: Retail Sales, est. 0.5%, prior 1.0%
  • 9 a.m.: IMF releases report on global financial stability
  • 10 a.m.: Business inventories, est. 0.8%, prior 0.9%
  • 10:30 a.m.: DoE inventories
  • 1 p.m.: U.S. to sell $21b 10-year notes reopening
  • 2 p.m.: Fed’s Beige Book
  • 5 p.m.: Fed’s Bullard to speak in St. Louis

 

WHAT TO WATCH:

  • Leonard Green may make bid for BJ’s Wholesale Club today; BJ’s said to ask for opening round proposals this week: N.Y. Post 
  • China’s debt rating may be cut for first time in 12 years after record jump in lending: Fitch.
  • Newsletter writers classified as bears by Investors Intelligence was below 20% for second week in a row. Bullish sentiment declines to 55.4% from 57.3% in the latest US Investor's Intelligence poll
  • EU Commission fines Procter & Gamble and Unilever a total of €315.2M in washing powder cartel case
      

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Sugar Seen Declining as Production in India Set to Climb 5% on Plantings
  • Oil Drops a Third Day in New York as Libyan Rebels Consider Truce Proposal
  • Soybeans Advance as Biggest Drop in a Month Lures Importers; Corn Climbs
  • Copper May Drop for Third Day on Concern About Credit Tightening in China
  • Gold May Rebound From One-Week Low as Japan Concern, Libya Add to Demand
  • Cocoa May Advance on Ivory Coast Disruption; Coffee Climbs, Sugar Drops
  • Equities Trump Gold as Investors' Best Inflation Hedge: Chart of the Day
  • China Cotton Buying Slows for U.S. Sellers, Eastern Trading Co.'s Lea Says
  • Rio Tinto Iron-Ore, Coal, Uranium Production Declines on Australian Floods
  • BHP Isn't Justifying Laggard Woodside's Most Expensive Valuation: Real M&A
  • Rubber Futures Tumble as Toyota Set to Suspend Output at European Plants
  • Cocoa Arrivals Gain 36% From Brazil’s Bahia Region, Thomas Hartmann Says
  • Malaysia Plans Sugar IPO, Postal Sale as State Companies Pledge to Divest  

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

EUROPEAN MARKETS

  • Industrial production data for the euro area suggests that the economic outlook continues to deteriorate for the region’s weakest countries; EuroZone Feb Industrial Production +7.3% y/y vs consensus +7.8% and prior revised +6.3% from +6.6%; EuroZone Feb Industrial Production +0.4% m/m vs consensus +0.7% and prior revised +0.2% from +0.3%
  • European equity markets trade higher following a positive lead from Asia
  • France Mar CPI ex tobacco +0.8% m/m, prior +0.5%
  • Germany Mar Wholesale Prices +10.9% y/y vs consensus +10.7%, prior +10.8%
  • UK Feb ILO unemployment rate +7.8% vs con +8.0%
  • UK Mar claimant count +0.7k vs con (4.2K)

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING EURO

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING EURO

 

ASIA PACIFIC MARKTES:

  • Asian markets rose in the afternoon after seeing limited gains in the morning.
  • South Korea and India led the region.
  • Vietnam and Pakistan were outliers on the downside.
  • Japan March CPGI +0.6% m/m, +2.0% y/y.

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING ASIA

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING ASIA

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels413

 

 

 

Howard Penney

Managing Director


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