TODAY’S S&P 500 SET-UP - April 14, 2011


Peru fell 6.2% bringing the biggest three-day decline since October 2008 to 12% on concern opposition candidate Ollanta Humala will win the presidential runoff in June and expand government control of the economy.   Year-to-date the market is down 20% making it the world’s second-worst performer after Egypt.  As we look at today’s set up for the S&P 500, the range is 17 points or -0.34% downside to 1310 and 0.96% upside to 1328.




Yesterday, the Financials broke TRADE and TREND.  We now have 5 of 9 sectors positive on TRADE and 8 of 9 sectors positive on TREND.    


THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: 101 (+1599)  
  • VOLUME: NYSE 900.85 (-5.13%)
  • VIX:  16.92 -0.99% YTD PERFORMANCE: -4.68%
  • SPX PUT/CALL RATIO: 1.68 from 1.50 (+12.59%)



  • TED SPREAD: 22.48 -0.250 (-1.100%)
  • 3-MONTH T-BILL YIELD: 0.06% +0.01%
  • 10-Year: 3.49 from 3.52
  • YIELD CURVE: 2.74 from 2.75 



  • 8:30 Initial Jobless claims
  • 8:30 PPI
  • 9:45 Bloomberg Consumer Comfort



  • Ford may slow or stop production in Asia this month due to Japanese-made-part-shortage - Detroit News
  • Justice Department, SEC looking into Libor rigging - WSJ
  • US foreclosures decline (35%) y/y in March according to RealtyTrac




THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • European Union Wheat Struggle Means No Relief From Near-Record Food Prices
  • Copper Falls for Fourth Day on Concern China Tightening May Erode Demand
  • Crude Trades Near Lowest in Two Weeks as Gains on Gasoline Supplies Fade
  • Soybeans Decline as Brazil Increases Exports, China May Sell From Reserves
  • Gold Trades Little Changed at $1,457.57 an Ounce, Paring Earlier Advance
  • Sell Silver as Gold Ratio Signals Slump, Commodity Broking's Barratt Says
  • Uranium Producers in Takeover Play as Assets Exceed Share Price: Real M&A
  • Gold Producers' Stocks Are Cheap, Former BlackRock Fund Manager Birch Says
  • BRIC Leaders Say Increasing Commodity Prices Pose Threat to Global Growth
  • Dwindling Cattle Herds Garner Ranchers Subsidized Loans: Argentina Credit
  • China Developer Seeks Approval for $157 Million New Zealand Farms Purchase
  • Europe Commodity Day Ahead: Glencore to Raise up to $11 Billion With IPO  




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • European equity markets moved lower from the open, with the exception of Ukraine and Hungary. 
  • Peripheral markets were among the leading fallers on continuing debt worries - Russia, Greece Italy and Spain leading the way down
  • Irish Central Bank Says Sovereign Debt Concerns Remain and pose threat to euro growth
  • Central bank cuts 2011 Ireland GDP forecast to 0.9% vs. 1% and sees Ireland 2012 GDP at 2.2%
  • The FTSE and DAX holding intermediate-term TREND lines of support, while Greek stocks look like they could start to crash, again.







  • Asia saw broad based weakness, albeit controlled; pricing in a US growth slowdown
  • China fell 0.26% after a rumor that March inflation was 5.3-5.4%; the official figure is to be announced tomorrow.
  • India rallied hard up 2.25% 













Howard Penney

Managing Director

Serfdom's Road

This note was originally published at 8am on April 11, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It is seldom that liberty of any kind is lost all at once.”

-David Hume


I shifted reading gears this weekend from Lincoln (“Team of Rivals”) and Bastiat (“The Law”) to Jefferson (“Undaunted Courage”) and Hayek (“The Road To Serfdom”). From a research perspective, I think it’s important to draw on history’s lessons in order to contextualize where we might be going next. While socialist leanings have impregnated our economic policies, liberty has not yet been lost.


Inasmuch as it was critical for investors to consider alternatives to Big Government Intervention strategies of the 1970s, it most certainly is now. If you didn’t know that Debauching Dollars perpetuates The Inflation, now you know.


Before I start digging into some of F.A. Hayek’s thoughts in “The Road To Serfdom”, let’s take our noses out of our text-books and consider some real-time market prices – here are some of the major week-over-week moves in Global Macro from last week:



  1. US Dollar Index = DOWN -1.3% to $74.86, closing on its YTD lows and down for 11 of the last 15 weeks.
  2. Euro = UP +1.4% to $1.44 versus the USD, closing at its YTD high after having its best quarter ever against the USD in Q12011.
  3. Canadian Dollar = UP +1.1% at $0.95 versus the USD, closing at its YTD high and remains a good way to be long Global Inflation.


  1. CRB Commodities Index (19 commodities) = UP +2.2% at 368, registering fresh weekly closing highs for the YTD (+11%)
  2. Crude Oil = UP +4.5% to $112.79/barrel, setting a new 32 month high and a new YTD high of +23.4% in 2011!
  3. Gold = UP +3.2% to $1474/oz, locking in a new all-time high – and, as we like to say at Hedgeye, all-time is a long time!

Countries (Equities)

  1. USA = DOWN -0.3% with the SP500 closing -1.1% off its February 18th, 2011 YTD closing high of 1343.
  2. China = UP +2.1% with the Shanghai Composite locking in a higher-high for 2011 YTD of +7.9%.
  3. Russia = UP +0.7% with the Russian Trading System (RTSI) moving into the #1 spot in Global Equities YTD at +19.9%.

There were obviously many other moves across global asset classes (i.e. global bond yields rising alongside inflation expectations) that mattered as well, but as a Chaos Theorist my job is to deliver you the deep simplicity of the point.


The point is correlation risk to the price of the US Dollar. That’s why I started with Currencies - because that’s where policy lives. The Inflation is an American policy. Whether The Bernank and Timmy Geithner want to be willfully blind to this or not, their monetary and fiscal policies are driving inflation through a US Dollar devaluation.


Not everyone agrees with this assessment. Not everyone likes being held accountable either. But if Americans want to tell the world with a straight face that Serfdom’s Road is the best path to prosperity – the rest of the world is just going to keep walking further and further away.


F.A. Hayek was not a fan of socialism or centrally planned economies. Neither am I. He wrote this many moons ago (1944) about “free markets”, but I think it’s worth re-reading, slowly – “the freedom of our economic activity which, with the right of choice, inevitably also carries the risk and the responsibility of that right.”


Never mind the privilege associated with giving one currency (USD) the “reserve currency” right. Never mind one man (The Bernank) abusing that right. There are risks and responsibilities associated with all that is a “free market” to begin with. Without accepting these risks and responsibilities at face value, President Obama, you are starting to blur the lines between political and economic freedom.


The good news here is that Americans are going to have this debate about Big Government Intervention, debts, and deficits out loud for the entire world to see. If you listen to Harry Reid or John Boehner long enough, you might say that’s really bad news too – but transparency is progress – if only it reveals how ridiculously politicized our economic policies and planning have become.


Hayek’s spite for central planning was born out of watching the Germans debauch and devalue their way to hyperinflation (1920s) and new left-leaning ideas coming out of Britain in the 1930s (Keynes).


“Hayek cited the new enthusiasm for socialist planning in Britain as an example of such misguided ideas. The economists who had paved the way for these errors were members of the German Historical School, advisors to Bismarck in the last decades of the 19th century.” (Hayek, “The Road To Serfdom, page 4)


I’m not a Keynesian. I’m not an Austrian. I am Canadian American. And I am looking forward to engaging in this generational economic debate. Is America going to entrench herself in a Hamiltonian posture of federal controls? Or is America going to revive her individual freedoms embedded in a Jeffersonian resolve?


I don’t know the answers to these questions. But I do know the risk management that will be required in taking either of these paths. The path to the dollar devaluation of the Keynesian Kingdom leads to Serfdom’s Road. And while I doubt I’ll feel that personally, the 44 million Americans on food stamps who are out there fighting The Inflation policy every day, sadly, will…


My immediate-term support and resistance lines for the SP500 are now 1320 and 1339, respectively. On a week-over-week basis I drew down the Cash position in the Hedgeye Asset Allocation Model last week to 40% versus 43% in the week prior. My allocation to US Equities is now 6%.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Serfdom's Road - Chart of the Day


Serfdom's Road - Virtual Portfolio

Tipping Point

“There’s an invisible tipping point – when we get there, it’s far too late.”

-Seth Klarman


Seth Klarman founded the Baupost Group in 1982 and runs north of $22B.  He’s done a better job than most managing risk out there over the course of the last 30 years – one of the hallmarks of his risk management strategy is doing nothing.


“I’m convinced, and have done this over the years, to invest in cash when there is nothing else out there that excites me. Cash is risky too, but less risky than making an overpriced investment.”


I pulled these two quotes from a Klarman transcript that was making the rounds in recent weeks. One of our sharpest clients sent it to me after a dinner I hosted in NYC where we had a lively Portfolio Manager debate about the only question that matters to the institutional investment community right now – when does the Fed’s music stop?


Whether it was in a New York restaurant or the meetings I’ll be doing in Boston today, I’ll be having the same discussion. Sophisticated investors get that this won’t end well for America – the only thing between now and “when we get there” is daily performance.


That only thing is a pretty big thing. The institutionalization of our industry has put short-term performance chasing in the hot-box of misunderstood market tail risks that remain. It’s omnipresent. It’s invisible – but it’s there. And after the next market crisis, you’ll be able to see it very clearly.


Presidents Bush and Obama don’t get how globally interconnected markets work. Neither do the Treasury Secretaries and Fed Heads that have advised them. When the entire game is all about gaming the game, sometimes the government guys who are being gamed forget that…


Now some people who think Hank Paulson and Timmy Geithner are “smart” will take issue with that – and that’s fine. Most of these people have never traded a market in their life – and if they did, they’d know that being smart doesn’t give you a birthright to being right.


This is where I think both the President of the United States and whoever is left in terms of his economic advisors have made some grave mistakes in the last few weeks. Market risk is all about expectations. They have set up both the catalysts and the fundamentals for a US Dollar crash.


Crash? Yes, Mr. President, get all the “smart” central planners of your economic universe to unite in Washington – and ask them what happens to a market and an economy when that country’s currency crashes. Oh, wait – the rest of the world is already trading ahead of you on this. As the US Dollar was crashing in Q2 of 2008, the petro priced in dollars went to $150/barrel. Then US Consumption crashed. Then Paulson puked.


Is the US Dollar going to retest those lows? Does the President want to experiment with that? Does the bubble in Big Government Intervention need a US currency crisis to get out?


Here are the market’s expectations and calendar catalysts:

  1. May 16 – thanks to the market expectation genius of Geithner, that’s the date he gave the world on US debt default
  2. June – last night President Obama outlined “June” as his “deficit deadline”
  3. July 1 – The Bernank is out of bullets (end of Quantitative Guessing II)

Nice. Since all of these professional politicians want to go grandma and children on me now every time they talk about America’s spending future, who in the high-schools of central planning decided to put all of our moms and kids on the trolley tracks for both the biggest monetary and fiscal policy showdowns in US financial history in the same 6 weeks?


You can say what you want about the politics of it all. You can say to yourself that The Inflation born out of burning our currency at the stake isn’t there. You can say whatever you damn well please. But the market price says all you need to know right now – it doesn’t lie like our politicians do.


Fed fans, don’t worry. These guys are on it. One of the cheerleaders of Big Government Intervention and easy money, St Louis Fed Head James Bullard, had this to say last night on the risk management matter of the June date that he helped impose as a market expectation:


“This is very much a live debate within the Federal Reserve. There is a lot of uncertainty about the optimal way to proceed as we haven’t been in that situation.”


Awesome. We’ve never done this before so we have no idea how it ends – so we’re talking about that “live” now because it’s almost May.


Sleep tight everyone.


My immediate-term support and resistance lines for the SP500 are now 1310 and 1327, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Tipping Point - Chart of the Day


Tipping Point - Virtual Portfolio

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CHART OF THE DAY: Past the Tipping Point?



CHART OF THE DAY: Past the Tipping Point? -  chart




April 13, 2011






  • Levi will be coming to America of sorts with the introduction of its Denizen brand slated to sell in Target this summer. Originally launched last year specifically for the Chinese market, the brand will be priced at the lower end of its signature Levi line at $20-$30 adding more competition to the low-end denim market. VFC’s Wrangler line is currently the price leader at Target with opening price points at $12.99. This is unlikely to be entirely Levi-induced. Target is sitting down with its vendors and is finding creative ways to keep price points down – especially with Wal-Mart’s more aggressive pricing strategies.
  • J Crew is catching flack this morning (enough to be highlighted on the Today Show) because one of its execs is in a promo photo painting her 5-year old son’s toenails hot pink. Yes, this is a bit unusual by most standards – it really looked to us like a happy mom goofing off with her even happier son. Apparently, the media found a way to tee this up in a way that ruffled feathers with some consumers. As for JCG, we’d argue that there’s no such thing as bad PR.
  • After stating back in February that it would close its fulfillment facility in Texas by April 12 in response to a $269mm bill for uncollected sales taxes, it appears that Amazon didn’t carry through on its claim. The online tax issue has certainly heated up over the last two months, however with Hawaii recently joining the growing swell at the state level, we suspect a resolution may be reached even sooner than anticipated.
  • In a move that rivals Ralph Lauren’s innovative 4D flagship event in NYC in November, Burberry is celebrating the grand opening of its Beijing flagship store with a live streaming event this morning. In the process of showcasing its latest line, the brand is sure to create a buzz by incorporating virtual image technology that will combine live models with animated footage and life-like holograms.  



Coach Sues Jo-Ann Fabrics - Coach Inc. hit Jo-Ann Fabrics, its subsidiary brand Craft Stores and The Feldman Co. Inc. with a trademark infringement suit Monday, alleging that the companies sold merchandise bearing a logo confusingly similar to its Signature C logo.  Filed in the Northern District of Illinois, the lawsuit claims that the pattern of elongated Os found on the Blizzard Fleece fabric sold by Hudson, Ohio-based Jo-Ann in stores and on its Web site has likely caused “consumer confusion” as it resembles Coach’s C trademark.  The luxury handbag and accessories maker said it became aware of the alleged infringement in February, and it promptly contacted Jo-Ann and Feldman, a New York-based textile company responsible for designing the fabric. <WWD>

Hedgeye Retail’s Take:  We’ll never give anyone flack for protecting their brand. But it’s kinda funny to think of Jo-Ann as a source for product that could confuse the consumer. 


H&M plans store in Niketown Denver’s Old Location - The long-anticipated announcement that H&M, a "cheap chic" clothing store, will open in the Denver Pavilions on the 16th Street Mall will be made today. The Denver Post has confirmed from sources close to the deal that the Swedish chain, which has been scouting out space in metro Denver for several months, has chosen the Niketown spot at the Pavilions for its first Colorado outlet. Niketown said last week that it will close its Pavilions location in mid-May. Pavilions owner Gart Properties will participate in an announcement naming a new "anchor tenant" at noon today. Gart officials would not comment further. Tami Door, president and chief executive of the Downtown Denver Partnership, also declined to name the new tenant but said H&M's entry would carry significant clout when it comes to attracting other major retailers new to the market. <DenverPost>

Hedgeye Retail’s Take: That didn’t take long. Just days after Nike announces it was leaving the Denver location H&M steps in. In fact, the pending vacancy was obviously known in the market for some time, but the perception is H&M’s appetite for new locations is notable. With plans to open 250 doors this year on a base of only ~2200 we’ll be seeing more of this in the coming months.


Adidas Raided for Alleged Price Fixing in Japan - The Japan Fair Trade Commission on Tuesday raided the Japan subsidiary of German sporting goods maker Adidas AG over its alleged pressuring of retailers not to discount its popular sports shoes series named EasyTone. Kyodo News reported that Adidas Japan was suspected of pressuring retailers to sell the product for 10,000 to 15,000 yen ($118-177), and of suspending shipments for stores that did not comply. Adidas, the world's second-biggest sporting goods maker, began selling the EasyTone shoes, under the Reebok brand, in Japan in 2009. The series has more than half the market for muscle-toning shoes in Japan, estimated at about 10 billion yen annually, Kyodo said.  <SportsOneSource>

Hedgeye Retail’s Take: Not an endearing move from a brand perspective. However, the reality is that it will impact consumer’s purchasing decision very little.


Brooks Brothers Fashions a m-Commerce Platform - A retailer with roots in the 19th century has jumped into the 21st century with a new mobile commerce site targeting its affluent fashion buyers who carry the latest smartphones. Brooks Brothers has launched an m-commerce site that enables shoppers to search or browse the merchant’s entire catalog of products and complete purchases. Four category links—Men, Women, Boys, Girls—sit at the top of the home page of the site, built by m-commerce technology provider Digby. Immediately below is a search box; retailers in m-commerce usually give prominent placement to the site search box for consumers on the go who want to get straight to a product they’re looking for. A large hero shot consumes the middle of the screen. Below that image are category bars, then smaller bars that link to a store locator (with GPS functionality that pinpoints the nearest Brooks Brothers store), a page that enables consumers to sign up for Brooks Brothers e-mails, and a page for tracking orders. At the bottom of the home page are Contact Us, Privacy Policy and Help links. <InternetRetailer>

Hedgeye Retail’s Take: Some retailers have very sexy e-commerce sites many of which include lots of flash technology, which is an unmitigated disaster when it comes to translating to mobile functionality. Mobile platforms require individual attention – something more retailers are beginning to realize…even Brooks Brothers.


Google “checks in” with Retailers - In a move to better compete with such location-based mobile check-in programs as foursquare, Facebook Places and shopkick, Google Inc. is adding check-in offers from national chains including American Eagle Outfitters and Finish Line to its Google Latitude app. American Eagle Outfitters is offering up to 20% off a total purchase for check-ins, sandwich shop Quiznos a free sub when consumers buy one sub of equal or greater value, and Finish Line $10 off on purchases of $50 or more. Radio Shack is also participating and Macy’s will soon join in. Google began last month offering discounts and deals for consumers who checked in to participating merchants in Austin, TX. Now consumers can check in to receive discounts at thousands of locations across the U.S., Google says in a blog post. To check in, a consumer opens the app and taps a button to activate the GPS that senses the consumer is within a store or other location. <InternetRetailer>

Hedgeye Retail’s Take: Google was not a first mover in the location-based technology game and now they’re having to play a game they aren’t used to – catch up. Our sense it’s going to take quite a bit more than 20% deals to drive interest in their technology and we’re looking forward to seeing what the company comes up with.


Chinese Consumers Altering Luxury Goods Landscape - Advertising executive John Kwok recently spent thousands of dollars on a traditional-style Chinese jacket at luxury retailer Shanghai Tang's Pedder Street store in the heart of Hong Kong's business district. Shoppers such as Kwok represent the future for Chinese luxury goods buyers, seeking out goods that emphasise China's culture rather than just the Western heritage and exclusivity that have proven so effective to date, industry experts say.  "You can't find anything similar at other international labels," said Kwok, describing his Shanghai Tang purchase. "It's not about price, but availability."  Across from Pedder Street, at the upscale Landmark shopping mall, brands such as Gucci and LVMH vie for Chinese shoppers, whose appetite for luxury goods is expected to make China the world's biggest luxury market within five years.  Brands such as Shanghai Tang, part of Richemont Group , and Hermes, which launched its China-focused label Shang Xia late last year, may have a head start in meeting changing appetites, analysts say.  <EconomicTimes>

Hedgeye Retail’s Take: Traditional Chinese cultural fashion is certainly not mainstream, but there’s no reason to think that it won’t slowly bleed into the global fashion scene. While many global retailers ride continued demand for traditional Americana style, the reality is that as the share of global purchasing power shifts towards Asian consumers, retailers will follow. Given significant cultural hurdles, expect western brands to start acquiring local talent – particularly those that have already made the move to establish a physical presence.




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

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