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The Macau Metro Monitor, May 24, 2011




Changi Airport handled 3.73MM passengers in April, a 13.7% increase compared to the same month in 2010. 


According to a person familiar with the matter, LVS approached banks for a $3.525 BN loan for its assets in Macau.  The five-year facility will pay interest and fees of 253bps+ LIBOR at the all-in level.  Proceeds will be used for refinancing.  VML U.S. Finance, a unit of the company, will borrow the funds while Venetian Macau Ltd. will guarantee the facility.

Being Early

This note was originally published at 8am on May 19, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“As always, if you listen to my advice, be prepared to be early!”

-Jeremy Grantham, May 2011


If you have not yet read Jeremy Grantham’s most recent GMO Quarterly Letter titled “Time To Be Serious (and probably too early) Once Again”, I highly recommend it. He’s been managing Global Macro risk for a long enough time to know that the best lessons in this business are learned the hard way.


Managing interconnected Global Macro risk is hard. So is keeping up with the required risk management reading that’s readily available to you. If you read too much groupthink, you’ll miss the deep simplicity of Mr. Macro Market’s signals. If you read too little history, you’ll miss the context by which the patterns of human behavior rhyme. Your reading needs to be focused and timely.


For me, it’s taken almost 13 years to realize that I read too much garbage and too little history. So, in the last 3 years I’ve worked on changing that. The plan on this front is always that the plan is going to change, but currently my reading process falls into two buckets:

  1. My pile
  2. My books

My pile, as my teammate of many years Tanya Waite can attest, is perpetually mounting. From my desk, to my bag, to airplane pockets around the world, my pile is my Princeton hockey player. I will fight it until I knock it down. My pile is a series of print outs (Grantham, Gross, etc.), white papers, and whatever else my team sends me that refutes or augments my current thinking.


My books, like my emotional baggage, are always with me – that’s why you’ll see me cite books in the sequence that I am reading them. I just finished reviewing “The Road To Serfdom” and “Undaunted Courage.” My challenge is to read at least 1 book every 10 days. On the plane to Denver last night, I was reading “The World In 2050” – more on that book and being long Northern Rim Countries (NORCs) in the coming weeks.


Back to Grantham’s problem of Being Early

  1. Being Early to work isn’t a problem – it’s cool
  2. Being Early to mentally prepare for a game is better than being late
  3. Being Early in our institutionalized world of chasing short-term performance is also called being wrong

That’s Wall Street. In evaluating our professional competence, our process and principles can always be trumped by our short-term P&L. Are you wrong today because you are about to be right? Or are you right today because you are about to blow up?


These are fair questions. Clients shouldn’t have to pay for my pile or performance problems. We are overpaid to over-deliver over long periods of time. As Risk Managers, we are tasked with explaining to our clients what it is that we are doing and why.


As Grantham points out in his Quarterly letter, “we often arrive at the winning post with good long-term results and less absolute volatility than most, but not necessarily with the same clients that we started out with.” Isn’t that the truth? Your clients need to know your duration too.


Back to the Global Macro Morning Grind…


No matter where you go this morning, there it is – The Correlation Risk to the US Dollar Index. For the week-to-date, the US Dollar Index is down a measly -0.65%, but look at the pop you are getting in the big stuff that’s priced in those Burning Bucks:

  1. CRB Commodities Index = +1.7% week-to-date
  2. WTI Crude Oil = +1.3% week-to-date
  3. SP500 = +0.22% week-to-date

Ok, maybe a 22 basis point move in US Equities isn’t the kind of pop that would get you all fired up, but maybe that’s the point. Maybe people are starting to get the math. Since the immediate-term inverse correlation between the SP500 and the USD is -0.84% (extremely high), maybe people are starting to consider the other side of the immediate-term TRADE.


What if the US Dollar stops going down from here?


The answer to that question is a trivial one. US stocks and commodities corrected -3% and -9%, respectively, in the last 2 weeks of a USD rally. While a strong dollar is great for this country, it’s awful for stock and commodity markets in the immediate-term. Yes, Mr. Bernanke, the country and the markets are 2 very different things.


This is where all of my reading runs parallel with my risk management signals – and yes, there is also a huge difference between the research embedded in your reading and how you manage risk in your portfolio. Every once in a while a risk management signal jumps out at me that’s impossible to ignore. Currently that signal is an immediate-term TRADE breakout in the US Dollar Index.


If you were only to allow me one live market quote to manage all Global Macro risk on for the next 3 weeks, I’d take the USD Index. The line in the sand is currently $74.41. That’s my TRADE line – and my risk management process is to respect it until correlation scores tell me not too.


If $74.41 holds support, I sell stocks and commodities (that’s why I have sold all my Oil and Gold in the last 2 weeks). If $74.41 breaks, I’ll be forced to go back to speculating on what The Inflation trade can do.


Being forced to do things isn’t cool. But, like Grantham, I have learned to take a measurable level of risk to speculate in these correlation trades. On page 2 of his Quarterly Letter, Part 2 – “Time To Be Serious” – May 2011, this is how the self-effacing Grantham summed up the same:


“As readers know, driven by my increasing dislike for being early by such substantial margins, I have been experimenting recently with going with the flow. In defense of this improper behavior, rest assured that it was motivated not by chasing momentum, but by my growing recognition of the immense power – sometimes the thoroughly dangerous power – of the Fed.”


Being Early doesn’t work until it does.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Being Early - Chart of the Day


Being Early - Virtual Portfolio




TODAY’S S&P 500 SET-UP - May 24, 2011


After seeing the SP500 get immediate-term TRADE oversold yesterday, we covered our short SPY position. This morning we’ll see another low-volume bounce in global equities - prepare to manage risk proactively into strength as this week is loaded with nasty US Housing catalysts.  As we look at today’s set up for the S&P 500, the range is 20 points or -0.18% downside to 1315 and 1.30% upside to 1335.









  • ADVANCE/DECLINE LINE: -1784 (-883)  
  • VOLUME: NYSE 866.82 (-12.65%)
  • VIX:  18.27 +4.82% YTD PERFORMANCE: +2.93%
  • SPX PUT/CALL RATIO: 2.13 from 2.08 (+2.40%)



  • TED SPREAD: 20.06
  • 3-MONTH T-BILL YIELD: 0.06% +0.01%
  • 10-Year: 3.13 from 3.15
  • YIELD CURVE: 2.58 from 2.60 



  • 8:25 a.m.: Fed’s Duke speaks on financial education in Boston
  • 9:50 a.m.: Fed’s Hoenig, Plosser speak in Phila.
  • 10 a.m.: New home sales, est. 300k (0.0%), prior 300k
  • 10 a.m.: Richmond Fed manufacturing index
  • 11:30 a.m.: U.S. to sell $28b 4-wk bills
  • 1 p.m.: U.S. to sell $35b 2-yr notes
  • 1:20 p.m: Fed’s Bullard speaks in Missouri
  • 4:30 p.m.: API inventories    


  • China appeals WTO ruling on car tires - Reuters
  • Moody's reviews ratings of selected UK financial institutions for possible downgrade
  • BP-Rosneft deal finished for the moment, says Russian Energy Minister Sergei Shmatko - WSJ
  • Weekly USDA crop report indicates 32% of winter wheat crop is in good or excellent condition; Compares to 32% last week and 66% in the same week last year.
  • Eurocontrol says it expects to cancel up to 500 more flights today - NYT 
  • At least 20,000 people have fled Sudan's Abyei region after northern army seized the area over the weekend, UN says 
  • China ratings agency Dagong cuts UK credit rating to A+ with neg outlook on "deteriorating debt repayment ability"







  • Goldman, Morgan Stanley Bullish on Commodities, Raise Oil Forecasts 20%
  • corn Production in China Climbing to Record Set to Limit Imports This Year
  • Oil Rises in New York After Biggest Loss in Week; Goldman Raises Forecast
  • Copper Advances as Goldman Sachs Advises Investors to Buy; Zinc Increases
  • Soybeans Gain as Demand for Commodities Used in Foods, Fuel May Strengthen
  • Sugar Climbs as EU May Allow More Duty-Free Imports; Coffee Prices Gain
  • Gold May Climb for Third Day as European Debt Crisis Buoys Haven Demand
  • Copper to Be Volatile, Will Not ‘Collapse,’ JPMorgan’s Schirmeister Says
  • India May Halt Potash Imports Without Price Accord, Farming Group Says
  • Feed-Grain Demand in South Korea May Decline 10% After Cattle, Hogs Culled
  • Palm Oil Advances as Soybeans Gain on Delays to Plantings in U.S. Midwest
  • Oil Supplies Sink in Survey as U.S. Floods Curtail Imports: Energy Markets
  • G8-Led Group Agrees to Biofuel Output Guidelines to Combat Global Warming







  • Germany leads region to another higher low on a decent IFO print; Sweden +0.6% (we bought it yesterday on the blowoff)
  • France May Business climate 107 vs consensus 109 and prior revised to 109 from 110
  • Germany Q1 final GDP +1.5% q/q and prior +1.5%; Germany Q1 final GDP +5.2% y/y and prior +5.2%
  • Greece will default if it does not get next EU/IFM bailout tranche -- Greece Financial Minister, as cited by Reuters





  • ASIA: wet Kleenex bounce for markets closing up with China down again, India down to -12.3% YTD and Vietnam collapsing (down -17.4% since May 4!)









Howard Penney

Managing Director

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DKS: Shorting for a TRADE


Keith shorted DKS in the Hedgeye virtual portfolio when the stock broke his TREND support of $40.29 and immediate-term downside to $37.03. Though we don’t think the fundamental story is broken, the Street shook out above management's guidance of $0.47-$0.49 in the upcoming q. We need to bank on sequential acceleration in biz for that to happen, which leaves us less than comfortable.


DKS: Shorting for a TRADE - DKS Levels 5 24 11



***As a courtesy to you, we're republishing our deep-dive on the Debt Ceiling topic. Originally published on May 11th, this piece walks through the current impasse and how we think it will impact financial markets and the broader economy. In addition we include analyses of prior impasses as reference points for comprehending the current setup.***


Conclusion: We expect the current debt ceiling debate to heat up substantially in the coming weeks, resulting in a measured pickup in volatility across global financial markets, primarily as a result of increased  volatility in the US Dollar being driven by the whims of D.C. politicking. Further, we expect the debt limit to be increased prior to any sort of default on any of the federal government’s obligations. And within that legislation, we would expect to see the groundwork laid for potentially meaningful fiscal reform ahead of the FY12 budget debate – an event that is likely to prove dollar bullish when it’s all said and done.


With the debt ceiling debacle looming over the horizon, we thought we’d use the opportunity to equip you with an in-depth guide for navigating the next 3-4 months of what is likely to be heightened volatility for global currency, bond, and equity markets. Even as QE2 expires in June, macro markets are likely to continue to gyrate on the whims and words of a few “inspired” politicians within our nation’s capitol.




In short, while we accept the consensus belief that the debt ceiling will eventually be extended prior to any sort of default on the US government’s obligations, we do believe the events and rhetoric leading up to the passage of any deal will be anything but “smooth sailing”. As such, we are in the process of taking down our gross and net exposure within the Hedgeye Asset Allocation Model and Virtual Portfolio due to our expectation of heighted volatility in the months ahead. Below we explain the drivers of said volatility via an in-depth analysis of the current political situation and previous debt ceiling impasses.


Current Situation


Hitting the Ceiling: Congress created the statutory federal debt limit in the Second Liberty Bond Act of 1917 as a result of negotiations which resulted in securing financing for WWI and creating an additional check on the fiscal power of the executive branch/ruling party. While federal debt is appropriately divided between debt held by the public and intra-governmental debt, nearly all of it is subject to the limit. The powers that be at the time of creation appropriately intended the debt ceiling to be a reoccurring opportunity to reassess the direction of the US’s fiscal policy. It is, however, not without limitations, as the current consequences of not increasing the debt ceiling almost always outweigh the current consequences of extending it, making it quite toothless from a policy making point of view.


Creating Headroom: As indicated in Treasury Secretary Geithner’s most recent letter to Congress on May 2nd, we are scheduled to hit the current $14.294T debt limit on this upcoming Monday, May 16th. As such, Geithner & Co. must take “extraordinary measures” to ensure the US government has enough cash on hand to navigate the timing of cash flows in order to fulfill its existing obligations.


The first trick in his bag of is to declare a “debt issuance suspension period”. This allows him to suspend (until further notice) the issuance of State and Local Government Securities, prematurely redeem existing Treasury securities held by the Civil Service Retirement and Disability Fund, suspend the issuance to that fund as investments, and suspend the daily reinvestment of Treasury securities held by the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan. In addition, he may be forced to suspend the daily reinvestment of Treasury securities held as investments by the Exchange Stabilization Fund. For the sake of brevity, we’re not going to explore in this report the exact technical mechanisms by which these measures contribute to freeing up headroom under the debt ceiling, as the net result of each step is overwhelmingly benign as it relates to the economy and financial markets. For all those interested in digging into these processes a bit more, we are happy to follow up with you.


All told, in conjunction with “higher than expected tax receipts”, the aforementioned measures are expected to extend the Treasury’s borrowing authority until “roughly” August 2nd under current projections for financing needs ($738B through the September 30th end of FY11 as of April 27th). The Treasury has asked for a $2 trillion hike in the debt limit to accommodate financing through FY12 under current budget projections.


After the ceiling is hit on or around that date, the US government will begin to default on its obligations absent an increase in the debt ceiling or some form of temporary legislation exempting new issuance from being counted towards the statuary debt limit. What is being made clear by Geithner’s letters to Congress is that he considers any failure to pay any of the US government’s obligations (not just interest payments and principal redemptions on Treasury securities) as a detriment to the full faith and credit backing America’s hand shake. While we don’t often agree with the man, we do find common ground on this principle and we believe the vast majority of Americans would agree. Below is a list of federal government liabilities that would be directly impacted should the debt ceiling not get raised in time: 

  • US military salaries and retirement benefits;
  • Social Security and Medicare benefits;
  • Veteran’s benefits;
  • Federal civil service salaries and retirement benefits;
  • Individual and corporate tax refunds;
  • Unemployment benefits to States;
  • Defense vendor payments;
  • Student loan payments;
  • Medicaid payments to States; and
  • General operational expenses for federal government facilities. 

Net-net, the sheer breadth of this list alone gives us conviction that Congress will ultimately enact a permanent increase in the debt ceiling or at least kick the can down the road by temporarily upping the limit to accommodate borrowing needs through the either the remainder of FY11 or CY11. Of course, as with all of life’s many destinations, it’s the journey there that matters most. Given that, we offer the next section as a guide for the road ahead.


Political Stakes: Since 1960, Congress has passed legislation which increased (permanently or temporarily) or revised the definition of the debt ceiling 78 times – 49 times under Republican presidents and 29 times under Democratic presidents. So while it may seem like reaching the debt ceiling is a big deal at face value, in reality, increasing the debt limit is quite a common occurrence.


Judging by the political posturing and partisan rhetoric being thrown around Capitol Hill currently, however, we expect this round of Piling Debt Upon Debt to be anything but commonplace – especially with characters like Boehner and Reid leading the charge. The next few months will be full of enough headline-worthy news quotes, political posturing, brinksmanship, and enough fear mongering to rattle global financial markets. As we outlined at the beginning of the year, the 112th Congress is among the greatest risks to global financial stability. This summer we expect them to prove us right in spades.


As such, we’ve compiled recent quotes from politicians on either side of the aisle in an effort to outline the strategies and goals of each party in the upcoming negotiations. While paraphrasing would indeed save time and space, we find their messages better delivered by actually “YouTubing” these bureaucrats at face value.  Also, if we’ve learned anything from the near government shut down we’ve recently experienced several weeks back (over just $38.5B in “reported” budget cuts), it’s that neither side is afraid to send us to the edge of chaos in order to advance their political agenda.



  • 5/9: Charles Schumer, Chairman of the Senate Rules Committee, NY: “Mr. Boehner needs to have an adult moment here and now… This next speech by the Speaker will be a litmus test on whether House Republicans plan to finally approach the debt ceiling as adults. So far many of them have not been responsible about this issue at all.”
  • 5/9: Roger Altman, Chairman of Evercore Partners, former Treasury Secretary under Clinton, and consultant of Sen. Schumer: “Markets could crash if it begins to look like Congress will allow a default.”
  • 5/10: Kent Conrad, Senate Budget Committee Chairman, ND: Unveiled a budget proposal which called for a 50-50 split between spending cuts and tax increases. The plan was immediately rejected by Republicans.
  • 5/10: Jay Carey, White House Press Secretary: “It is folly to hold hostage the vote to raise the debt ceiling to prevent the United States of America from defaulting on its obligations to any other piece of legislation… Maximalist positions do not produce compromise.” 
  • 5/10: Chris Van Hollen, MD: “We have identified some areas of common ground [in today’s bipartisan meeting]. The major areas of disagreement have not yet been engaged.” 


  • 1/7: Mike Huckabee, former Governor of AR: “One of the things that gives a little bit of juice for the Republicans is that Senator Barack Obama in 2006 stood on the Senate floor with an impassioned speech, saying that we should not raise the debt limit, that it was the lack of leadership, and that George Bush was just completely derelict in duty by asking Congress to raise the debt limit… Mr. President, we certainly don’t think you’ve made this radical change in just a few years, so we’re going to take you up on it.”
  • 5/5: John Boehner, Speaker of the House, OH: “Instead of talking about billions [of budget cuts], I think it’s time to start talking about trillions. They should be actual cuts and program reforms, not broad deficit or debt targets that punt the tough questions into the future... Nothing is off the table except raising taxes.”
  • 5/5: Mitch McConnell, KY: “We face a crisis that makes the panic of 2008 look like a slow day on Wall Street.” Still, McConnell suggested to the Senate floor that he would only vote for an increase in the debt limit in exchange for “deep and permanent” cuts in federal spending.
  • 5/5: Steve King, IA: “I’d put the cutting off of all funds to ObamaCare on that debt ceiling bill and say, there’s going be no raising of the debt ceiling here by the House of Representatives unless we shut off all funding that is going to implement or enforce ObamaCare.”
  • 5/5: Paul Ryan, WI: “[Spending] caps in and of themselves, alone I don’t think our conference would accept that. The GOP wants a down payment of spending cuts… Knowing that we are very far apart between the president, the Senate and where we are, we are not under any illusion that we’re going to get some grand- slam agreement… getting a single or double instead of a home run is the goal of the talks… Tax increases are off the table and triggers for automatic tax increases are a cop-out for those who cannot cut spending.”
  • 5/9: John Boehner, Speaker of the House, OH: “To increase the debt limit without simultaneously addressing the drivers of our debt – in defiance with the will of our people – would be monumentally arrogant and massively irresponsible. It would send a signal to investors and entrepreneurs everywhere that America still is not serious about dealing with our spending addiction... It’s true that allowing America to default would be irresponsible, but it would be more irresponsible to raise the debt ceiling without simultaneously taking dramatic steps to reduce spending and reform the budget in the process.”
  • 5/9: Michael Steel, Spokesman for Boehner: “The American people flatly reject Senator Schumer’s call for a blank check for the Democrats who run Washington to keep their spending spree going. There’s no way an increase in the debt limit will pass without real spending cuts and reforms.”
  • 5/11: Eric Cantor, House Majority Leader, VA: “The substance of [Tuesday’s] discussions was trying to focus in on areas where we can cut spending and cut it big.” He affirmed house support for Boehner’s recent demands for trillions of dollars in budget cuts, saying “Anything less is not serious”

Tea Party

  • 4/10: Sarah Palin, former VP nominee and Governor of AK: “There needs to be an understanding in the GOP leadership that we cannot provide another tool for the liberals to just incur more debt, and that’s what raising the debt ceiling is going to allow again.”
  • 5/9: Michele Bachmann, MN: Recently stated that any vote to raise the debt ceiling must be attached to a bill fully de-funding ObamaCare. She also criticized Boehner for “squandering” an opportunity to cut spending in the latest continuing resolution.
  • 5/9: William Temple, Head of this fall’s Tea Party National Convention: “We’re telling Boehner and all of the House Republicans they came into office with Tea Party help. We now expect them to keep their promises and hold the ceiling on the national debt.” He added that the party would support a small increase if it were to be accompanied by a major policy win such as the repeal of ObamaCare. 

All in all, the gaping divide between the two ideologies on what it would take to collectively lift the debt ceiling by early August is omnipresent in their recent commentary. While it’s clear that some fiscal reform will be included in any legislation towards increasing the debt ceiling (US dollar bullish), it’s almost equally as clear that: a) it will fall short of current Republican demands (US dollar bearish) because the Democrats are, on the margin, willing to stand their ground and engage in this game of political brinksmanship (evidenced by GOP leaders backing away from their recent support of Paul Ryan’s Medicare reform plan); and b) as political brinksmanship inches us closer to the deadline, we are likely to see a measured increase in fear-mongering quotes that are likely to be the source of much consternation for global financial markets.


As such, we anticipate a broad-based pickup in volatility, given the heighted Correlation Risk we’ve seen across all asset classes to date. This tug-of-war on the US dollar is an acute risk that needs to be managed around, particularly from a timing perspective. In short, the playbook is as follows: Republican compromise = dollar DOWN; Democrat compromise = Dollar UP. Gaming Policy is about to get a little more challenging in the coming months.


Historic Impasses


Below we briefly touch upon prior debt limit impasses and how key financial markets fared in the months leading up to and just beyond the eventual increases.  Keep in mind that the charts below are not at all an attempt to forecast what might happen in the coming months; like history itself, no two debt ceiling periods are alike. Rather, the illustrations below are merely points of reference for pondering how the markets will react this time around.


1985: In September of 1985, the Treasury Department became unable to issue new securities as a result of the statutory limit on federal debt being reached. As such, it was forced to take “extraordinary measures” consisting of and similar to the maneuvers listed in the section above. The debt limit was temporarily increased on November 14, 1985 and permanently increased on December 12,1985 from $1.82T to $2.08T. In addition, the accompanying legislation granted the Treasury Department authority to declare a “debt issuance suspension period” in future debt limit impasses.




1995-96: On November 15, 1995, the Treasury Department declared the first ever “debt issuance suspension period” and used “extraordinary measures” to finagle its way through the beginning of the next year. It subsequently notified Congress that it did not have enough cash on hand to pay the March 1996 Social Security benefits, at which point Congress responded by temporarily increasing the debt limit in an amount commensurate to the upcoming benefit distribution ($29B).  Just one day before the March 15th deadline, Congress acted to extend the temporary increase by two weeks until March 30th. And just one day before that deadline, Congress passed legislation permanently increasing the debt limit to $5.5T from $4.9T.




2002-03: At several instances during this two year period, the Treasury Department had to declare “debt issuance suspension periods” (April 4, 2002-April 16, 2002; May 16, 2002-June 28, 2002; and February 20, 2003-May 27, 2003) and take “extraordinary measures” to smooth the timing of cash flows in order to meet the federal government’s obligations. The debt limit was permanently increased twice during this legislative impasse; first on June 28, 2002 to $6.4T from $5.95T and subsequently on  May 27, 2003 to $7.38T.






While we expect the US dollar to find a bid at some point in the coming months due to the market eventually looking through this impasse to the increased likelihood of meaningful fiscal reform in the intermediate term, we do think the weeks leading up this occurrence will provide another opportunity for the global currency market to vote against the short-term political compromises we continue to see out of Washington D.C. If anything, this exercise will continue to expose to the world just how far away both sides are from agreeing on a credible solution to the #1 issue driving the US’s long-term fiscal and balance sheet deterioration – entitlement spending. Over the near term, however, we expect the tough choices to continue to get punted to future sessions of Congress.


Darius Dale





Sources: US Department of the Treasury, CBO, Government Accountability Office, The Hill.com, Fox News, Congressional Research Service, and National Association of State Budget Officers.

European Risk Monitor: Greece at the Forefront

Positions in Europe: Long Germany (EWG); Sweden (EWD)


All eyes are back on Greece on the backdrop of increased European credit and political uncertainty over the last week.  As we continue to press, piling debt upon debt doesn’t end well – now the question remains the timing and form of a Greek debt default, restructuring, or some combination or hybrid of the two. Last week Jean-Claude Juncker candy-coated the issue and called for a possible “re-profiling” of Greek debt. What’s apparent is that EU officials will continue to extend & pretend, by delaying and/or re-allocating funds over the near to intermediate term to make concessions for Greece’s fiscal shortfalls. This should ultimately add support in the EUR-USD trade (around $1.40), but by no means reduce volatility in the pair.


Through increased pressure from EU officials, the Greek government is meeting this week to discuss a fifth austerity package, with plans to sell €50 billion of state assets to help pay down its bloated deficit. The headline risk associated with the talks continues to punish the capital markets of Greece and the rest of the periphery. Last week the Greek Athex (equity) was down -4.3%, and is down a full -25% since its ytd high in mid February. This morning we see yields of 10YR bonds from the PIIGS jumping, with Greece rising a full 44bps to just short of 17%, while Portugal rose 41bps to 9.63%!  A similar trend is seen with sovereign CDS, and the question remains just how much more likely a default of Greece is with CDS in the area code of 1400bps versus say 1300bps? After all, Lehman Brothers blew up around 600bps (see charts below).


European Risk Monitor: Greece at the Forefront - b1


European Risk Monitor: Greece at the Forefront - b2


Of the news and data causing consternation this morning (European equity indices are down 150-300 bps today):


1.)   Preliminary Services and Manufacturing PMI for May out for the Eurozone, Germany, and France, all fell considerably month-over-month (see chart below). As we’ve been highlighting over recent months, we’ve seen pockets of high frequency data slowing from the region’s largest countries. We remain bullish on Germany (currently in the Hedgeye Virtual Portfolio), but cautious as we monitor the data. Certainly Germany has not been immune to inflation (CPI stands at 2.4% Y/Y), however readings continue to come in under the EU average, and significantly below UK CPI at 4.5%.  


European Risk Monitor: Greece at the Forefront - b3


European Risk Monitor: Greece at the Forefront - b4


 2.)   Standard & Poor’s revised Italy’s credit-rating outlook to negative from stable, citing the nation’s slowing economic growth and diminished prospects for reducing government debt. If you’ve been following our work you’d know we’ve taken this tact for months on Italy (and also Spain).  S&P affirmed Italy’s A+ long-term rating. 


3.)   PM Jose Zapatero’s Socialist Party suffered a huge blow in state and municipal elections of the weekend, as expected. The opposition center-right Popular Party took share in virtually all 13 regional governments that were up for grabs. Zapatero conceded the defeat but ruled out early elections. The political fragility of his party’s rule make it all the more unlikely that the country will be able to pass further austerity measures to limit the budget deficit (9.3% of GDP).  The protests being called on the streets over unemployment should remain a permanent fixture, as a coherent strategy for growth and reduction in joblessness is nonexistent. 


4.)   German Chancellor Angela Merkel’s Christian Democratic Union Party (CDU) suffered a blow in a state election in Bremen over the weekend. Voters re-elected the Social Democrats (SPD) with 38% approval, followed by the Green Party at 23%. Merkel’s CDU fell 5pp from last election to 20%. The set-back follows two other defeats in state election ytd (Hamburg and Baden-Wuerttemberg), and highlights the cracks forming in Merkel’s foundation. Importantly, voting shows Merkel’s popularity continues to be punished based on her flip-flop on nuclear power following Fukushima.



Our European Financial CDS Monitor shows that bank swaps in Europe widened last week, with 36 of the 38 swaps wider and only two tighter. A major inflection, as expected, was Greek banks.


European Risk Monitor: Greece at the Forefront - b5

European Risk Monitor: Greece at the Forefront - b6


We’ll get a number of confidence readings from Europe this week as well as second revisions of Q1 GDP.  Today we added Sweden via the etf EWD on the long side to the Hedgeye Virtual Portfolio. Sweden remains a fiscally sober country (like Germany) with a strong growth profile of 4.5% this year. So long as the country continues to see demand for its goods from the EU, we like the country’s outlook given the Riksbank proactive rate hikes to head off inflation.


Matthew Hedrick


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 80.51%
  • SHORT SIGNALS 78.32%