“Governments everywhere are still trying to cure by public works the unemployment brought about by their own policies.”

-Henry Hazlitt (Economics In One Lesson, page 208)


I suppose it’s only fitting that Henry Hazlitt revised his million-plus copies sold of “Economics In One Lesson” in June of 1978 (originally penned in 1946). That’s when the Western world was swallowing stagflation whole. That was shortly after the French introduced the G-Fluff.


G-Fluff, formerly known as the G-6 Central Planning Board (created by France in 1975), is now affectionately referred to by professional politicians as the G-8.


The G stands for Groupthink. The G-8 currently consists of Canada, France, Germany, Italy, Japan, Russia, United Kingdom, and the United States. Not to be outdone, The EU also sends their commissioners for 3 hour lunches that serve up piping hot bs, with broccoli.


This year’s G-Fluff conference is being held in a hoity-toity town on the northwestern coastline de la belle Provence. Les Obamas et les Sarkozys (hearing there may be more than a few of them – with adjoining rooms)… La rencontre… et la culture… sans le DSK.


BREAKING HEADLINE (out of the G-8 conference this morning):




Mais, qu’est-ce que c’est Le Recovery? Que’est-ce qui se passe avec Le Downside?


(Before someone goes all French socialist on me – for the record, my Mom’s side of the family is French-Canadian, and I went to French school until the 5th grade, learning how to read, write, and count in French before the English pig stuff.)


Back to Le Recovery et Le Downside


In Spain the socialists are running a 21.3% unemployment rate, so let’s not talk about that outcome of le debt financing les deficits – Spain isn’t allowed at the G-Fluff conference anyway.


Let’s talk about le USA.

  1. Yesterdays US jobless claims report rose 15,000 week-over-week to 424,000
  2. Ze rolling claim (the 4-week moving average) held at 439,000 – a new YTD high!

When considered on 1 of the 2 key measures of le success of Le Bernank (1. Full Employment, 2. Price stability), this is not good. Actually, it’s really bad – because our math suggests that for the unemployment rate in this country to recover, we’ll need to see weekly jobless claims consistently below 385,000.


Le Bernank et L’Obama get this. That’s why Le Bernank’s key statement less than a month ago at his Presser was:


“It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk.”

-Ben Bernanke, April 27, 2011


In other words, without Le Quantitative Guessing (and ze Inflation born out of it) – we do not know what to do.


May I suggest two eggs, side by each, pour ton fluffy dejeuner Madame Obama?


This entire Keynesian experiment and my mockery of it is a much more serious joke than I can muster this morning. For the last 6 months Hedgeye has been warning that a policy to inflate will structurally impair (slow) economic growth.


I’m actually getting tired of hammering my hockey knuckles into my keyboard every morning – as de French-Canadian goalie from “Slapshot”, Dennis Lemieux, might say – SLOW-z… SLOW-zzz – de Inflation slow-ZZZ de growth!


Back to the Global Macro Grind


The US Treasury Bond market is busting a move to the upside again this morning. US Treasury Bond yields are getting crushed. The 2-year is trading at 0.48% and 10’s are testing a breakdown of the 3% line. The Yield Spread (2-year yields minus 10’s) continues to compress (+258 basis points wide, down another 6 basis points week-over-week).


What does this mean?

  1. Growth expectations are slowing
  2. Inflation expectations are slowing

We call this Deflating The Inflation (Hedgeye Q2 Macro Theme), and we can send you the 50 page slide deck on how it works. The two long positions we have on to reflect this view are bullish on the long-end of the bond market (TLT) and long a US Treasury Flattener (FLAT).


Yes, we are aware that Le Bernank has to end le QG2 in 6 weeks. We are also aware that when this unprecedented Keynesian experiment ends, jobless claims in America could go a lot higher. I don’t have to wonder what Henry Hazlitt would say about that in June 2011.


My immediate-term ranges of support and resistance for Gold, Oil, and the SP500 are now $1511-1538, $96.89-101.57, and 1, respectively.


Have a great Memorial Day weekend. God Bless America. And best of luck out there today,



Keith R. McCullough
Chief Executive Officer


G-Fluff - UST Yield


G-Fluff - port2

The Last Stand of the Equity Bulls

This note was originally published at 8am on May 24, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“There are not enough Indians in the world to beat the 7th Cavalry.”

-George Armstrong Custer


I’m in the middle reading Nathaniel Philbrick’s book, “The Last Stand”, which is an account of General George Custer’s infamous defeat at the Battle of the Little Bighorn.   Even a novice in American history knows the outcome of June 25th, 1876, a day in which the 7th Cavalry Regiment was soundly defeated by the combined forces of the Lakota, Northern Cheyenne, and Araphao people on the Montana plains.


In total, according to archeologist reports, the 7th Cavalry suffered a 52% casualty rate.  The five companies that were directly under the control of General Custer fared much worse.  Near the end of the battle, Custer, and the troops directly under his control, found themselves in a weak strategic position on a hilltop, which would become known as Last Stand Hill.  According to almost all accounts, the Lakota completely annihilated 100% of Custer’s troops within an hour of initial engagement.   


Ironically, despite the inauspicious ending to his military career, George Armstrong Custer was probably one of America’s most celebrated cavalry commanders of his era.  While he finished last in his class at West Point, Custer had a meteoric rise in the Union army and at the age of 23, three days prior to the Battle of Gettysburg, was promoted to Brigadier General. 


At Gettysburg, Custer was credited with leading a mounted charge of the 1st Michigan Cavalry.  This charge halted the Confederate momentum at the Battle of Gettysburg, which would become known as the turning point of the entire Civil War.  Not only was Custer present at General Robert Lee’s surrender at Appomattox Court House, but the table on which the surrender was signed was given to Custer as a gift for his wife with a note from General Sherdian praising Custer’s bravery and his key role in the Union victory.


Perhaps, though, some of Custer’s early successes gave him some false confidence as it related to future military engagements.   According to reports from The Battle of the Little Bighorn, General Custer reportedly said the following shortly before his death:


“Hurrah boys, we’ve got them! We’ll finish them up and then go home to our station.”


With the history lesson complete, reading the story of Custer and the Battle of the Little Bighorn made me think contextually about the stock market.  In essence, I can’t help but wonder after a +95% move in the SP500 from the lows of March 2009, whether this is The Last Stand of the Equity Bulls.  Certainly, both price action and recent data suggests we are at a critical juncture.  As well, and not dissimilar to Custer, there is likely an over confidence bias pervading the stock market due to the expedited two year move off the bottom. (LinkedIn anyone?)


Just like the cavalry, we’ve been sounding the warning trumpets of our key 2011 investment theme that Accelerating Inflation will lead to Slowing Growth.  No doubt, we’ve been early sounding the trumpet, but the view is now playing out in spades.


A key tell for this theme has been the price of copper, which is down just over -10% on the year.  Dr. Copper is perhaps one of the most predictive markets for gauging future economic growth, especially from China, a nation that consumers 40% of the world’s copper.  In the most recent data from China, refined copper imports into China were down in April by -48% year-over-year and -17% sequentially from March.  On the LME, copper inventories are up +34% from their December 2010 lows.


In other industrial metals, similar trends are in place.  Lead inventories are up +53% this year to the highest level since February 1995, aluminum stocks are at near record highs and up +11% for the year, and zinc inventories are up +21% in 2011 and reached a 16-year high on May 18th.   Other commodities are signaling the same via price action with lumber down -28% in price in the year-to-date, rubber down -7%, and coal down -6%.  In aggregate, the commodity complex is clearly telling us that global growth is slowing.


While the most recent quarter of corporate earnings in the United States was decent, results, broadly, were characterized by margin compression.   This was a call our Retail team, led by Sector Head Brian McGough, was early and right in calling.  The bell weather indicator of cost inflation this quarter was Gap Stores, who cut their full year earnings estimates from a range of $1.88 to $1.93 per share, to a range of $1.40 to $1.50 per share due to “heavy cost pressure”.  Collectively, the “cost issue” was reflected in the number of quarters that “beat” earnings this quarter.  Incidentally, beats were down to the lowest level since Q4 2008 at 59.5%.  


With a couple more quarters of FIFO accounting and tough commodity input compares ahead for the stock market, the valuation / earnings growth story becomes less compelling for equities, especially in the context of a slowing top line.  Globally, slowing growth is being driven by the emerging world fighting inflation, with the most recent evidence being Chinese PMI coming in at a 10-month low.  In Europe, slowing growth is and will continue to come from massive austerity measures that are being implemented to, hopefully, head off massive debt restructuring.  While in the U.S., the consumer is facing a serious retrenching with U.S. average weekly earnings on a negative trend, unemployment numbers breaking out to the upside, and home prices continuing to be in free fall.


Despite the likelihood that corporate margins continue to compress in the coming quarters, which will continue the trends of slowing earnings momentum, those bullish of U.S. equities argue that yields on fixed income are so low that equities still offer a compelling risk / reward.  On some level we agree, as we’ve already made the case for the Fed to remain Indefinitely Dovish and James Bullard, the President of the St. Louis Fed, signaled as much when he said in a speech last night, “past behavior of the FOMC indicates that the Committee sometimes puts policy on hold.”


Being on hold is of course one thing, but not extending Quantitative Easing is quite another.  It is the later point that we believe the The Last Stand of the Equity Bulls is predicated upon.  Unfortunately, given the fact that reported inflation in the U.S. is actually set to accelerate, it seems unlikely that the Fed will re-up on Quantitative Easing in the short term.


Hurrah, equity bulls! Hurrah!


Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


The Last Stand of the Equity Bulls - Chart of the Day


The Last Stand of the Equity Bulls - Virtual Portfolio




TODAY’S S&P 500 SET-UP - May 27 2011


UST Bond Yields showing how bullish people are on the Growth Slowing trade this morning (bullish for bonds). 2s are immediate-term TRADE oversold at 0.48% and 30s at 4.22%, but this is really starting to look like May-July of 2010 in the bond market – they can run.


The Hedgeye favorite Macro long positions remain TLT and FLAT – and we bought our GLD back yesterday. If Growth Slowing and Deflating The Inflation (our Macro Themes) become consensus by mid-summer, all 3 of these positions should hold up just fine. Remember Gold acts best when real-interest rates imply negative yields.


As we look at today’s set up for the S&P 500, the range is 18 points or -1.18% downside to 1310 and 0.17% upside to 1328.









  • ADVANCE/DECLINE LINE: 1261 (+327)  
  • VOLUME: NYSE 846.11 (11.98%)
  • VIX:  16.09 -5.74% YTD PERFORMANCE: -9.35%
  • SPX PUT/CALL RATIO: 1.76 from 1.30 (+30.00%)



  • TED SPREAD: 20.84
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 3.07 from 3.13
  • YIELD CURVE: 2.59 from 2.59 



  • 8:30 a.m.: Personal income, est. 0.4%, prior 0.5%
  • 8:30 a.m.: Personal spending, est. 0.5%, prior 0.6%
  • 9:55 a.m.: UMich Consumer Sentiment, final: est. 72.4, prior 72.4
  • 10 a.m.: Pending home sales, est. M/m, (-1.0%), prior 5.1%
  • 1 p.m.: Baker Hughes rig count


  • EU Commission tables measure to ensure fluidity of the EU sugar market
  • Eurozone May Business climate 0.99 vs consensus 1.20 and prior 1.28
  • Microsoft CEO hints at tablet software - WSJ
  • Bank of America (BAC), Morgan Stanley (MS) pay more than $22M to settle wrongful disclosure on active troops - WSJ






  • Global Tire Demand Exceeding Supply Helps Bridgestone, Goodyear, Sumitomo
  • Corn-Planting Delays Signal Price Gain as U.S. Farmers Switch to Soybeans
  • Oil Rises on World Economy Outlook, Dollar; JPMorgan Sees OPEC Quota Gain
  • Copper Gains to Three-Week High on Indications of Stronger Chinese Demand
  • Thailand’s Sugar Exports May Surge to Record as Domestic Quota Lowered
  • Gold Heads for Second Weekly Advance on Europe Debt Concern, Weaker Dollar
  • Wheat Falls to $8.085 a Bushel in Chicago Trading, Erasing Earlier Advance
  • Copper Premiums in China Advance to Seven-Month High as Demand Recovers
  • Coffee Drinkers Won’t Get Break on Prices as Colombia Sees Global Deficit
  • Corn Demand in China Poised to Exceed Output for First Time in Three Years
  • Barrick Must Let Zambia Keep Equinox Shares as Part of Lumwana Approval
  • Mississippi Crop Cargoes Plunged 39% as Flooding Worsened: Freight Markets
  • Coal Set for Three-Year High on China Drought, Power Cuts: Energy Markets
  • Sugar Price May Gain Next Week on Signs of Increased Demand, Survey Shows







  • EUROPE: broad rally this morn but volume is sketchy; DAX (were long) wobbly at this level; Spain/Italy/Greece/Russia all broken TRENDs
  • UK May GfK consumer confidence (21) vs consensus (31)
  • Nationwide UK May house prices (1.2%) y/y vs consensus (1.7%)
  • European Automobile Manufacturers' Association (ACEA) Apr Commercial Vehicles Registrations in the EU +9.5% y/y





  • A bad week for Asian equities with China down 5 out of 5 days; Vietnam crashing, then bouncing hard (down -15.6% since May4); and Japan remaining abyss
  • Fitch revises Japan's outlook to negative from stable









Howard Penney

Managing Director

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

DKS: Sneaking One Past The Goalie?


Another deal for DKS? Accretive, perhaps. But incremental? Perhaps no. keep in mind that this might not be entirely incremental. Check out the timing of DKS’ prior acquisitions. July 2004. Feb 2007. Nov 2007. ALL of these deals occurred when the base business was slowing. We don’t want to suggest bad behavior in this instance when there’s not even a bid on the table. But this is an important factor to keep in mind if you see something hit the tape.



It looks like Texas-based Academy Sports may be on the block.


This shouldn’t come as much of a surprise given the lack of a clear succession plan following the passing of Academy’s founder Arthur Gochman this past October. It’s been a family run business through and through and while Arthur’s son has taken over at the helm, it makes sense for the family to shop the company to see what they can get with deal activity picking up in retail. With over 125 locations, Academy surpassed $2Bn in revenues back in 2007 according the company’s website and currently generates approximately $100mm in EBITDA – owners are looking for a 10x takeout offer.


A quick look at the company’s profile suggests that if competitors are looking at the deal, DKS is the most likely candidate. HIBB’s store format at an average size of 7,000 sq. ft. is a completely different concept altogether compared to Academy’s 60,000 sq. ft. box – they’re out. The Sports Authority while more similar in footprint at an average of 45,000 sq. ft. has a high degree of overlap with Academy locations so they would be forced to either close a substantial amount of stores or face some degree of cannibalism neither of which sounds appealing. Plus, TSA is still under the wing of Leonard Greene and waiting to come out. We cannot imagine that sponsors are willing to pump a billion dollars into this ill-timed investment.


That leaves us with Dicks. There’s virtually no overlap between the two companies and the average footprint is nearly identical with DKS over 50,000 sq. ft.   Also, Academy and its bankers are no dummies… They’re throwing out a 10x EBITDA multiple. Look at DKS’ past deals. Golf Galaxy and Galyan’s for 10.2x and 10.1x, respectively. (Chick’s, which it bought in 2007, was a small real estate play with undisclosed financials).


Academy is a quality retailer, and it dominates the space in perhaps the most important sporting goods market in the country. Will DKS pay 10x EBITDA? Without a doubt. Does the balance sheet allow it to do so? Probably.  With $500mm currently on the balance sheet and another ~$200mm in FCF expected this year, DKS could certainly make a bid and stay below 30% Net Debt/Cap.


In addition, DKS leases EVERY single store, and even most of the fixtures in its stores. Its strategy there is very aggressive. Could it restructure parts of Academy in a way that puts obligations off balance sheet? Probably. Does it bug the heck out of us that the Street continues to look through this for DKS – as if its most important asset (its stores) were free of a capital charge? Absolutely! But that probably won’t matter.


Depending on the financing structure – AND assuming that the reported $100mm in EBITDA is a real number -- a $1Bn price tag could be anywhere from $0.10-$0.20 accretive to the P&L.


But keep in mind that this might not be entirely incremental. Check out the timing of DKS’ prior acquisitions. July 2004. Feb 2007. Nov 2007. ALL of these deals occurred when the base business was slowing. We don’t want to suggest bad behavior in this instance when there’s not even a bid on the table. But this is an important factor to keep in mind if you see something hit the tape.


DKS: Sneaking One Past The Goalie? - DKS Acq Chart 5 11


DKS: Sneaking One Past The Goalie? - DKS LocationsAcademy 5 11





Key Commodity Callouts : Long Gold, Short Sugar

Positions: Long Gold via GLD; Short Sugar via SGG


Below are six commodities that we’ve been particularly focused on this week, and our immediate-term call on each.


Key Commodity Callouts : Long Gold, Short Sugar - commmmm


Gasoline: We think that the dollar is going higher and taking crude oil lower in the immediate-term, particularly as oil was unable to get above its TREND line, $101.50, today.  And with refiners ramping up percent utilization by 310 bps this week, gasoline inventories built surprisingly.  Lastly, gasoline demand continues to slow, down ~2% year-on-year.


Natural Gas: Despite today’s larger-than-expected inventory build of 105 Bcf, natural gas is holding above its TREND line of support of $4.31/Mcf.  Also, the number of rigs drilling for natural gas has slumped to a 16-month low.


Gold: Keith bought gold today in the Hedgeye Virtual Portfolio.  With US Treasury yields falling, we think gold will continue to move higher, as it has to compete with real yield.  And on demand, Chinese investors are buying more gold than ever, and have overtaken India as the world’s biggest purchasers of the metal.  China’s investment demand for gold more than doubled in 1Q11, now accounting for 25% of gold investment demand.  Gold is the only commodity we are long in the HVP.


Copper: Indicative of Global Growth Slowing, copper is broken on the TRADE and TREND durations, with immediate-term resistance at $4.14/lb.


Corn: Adverse weather in the US mid-con is causing concern this spring that the U.S. corn crop will not be bountiful enough to help ease a globally supply shortage.  Prices are rising as soggy weather continues to create problems for farmers trying to plant crops in key growing states.  And with only as much as 20% of the crop planted in several states, concern (and higher prices) is warranted.


Cotton: Cotton is down 22% in the last two months and looks a lot like copper.  It is bearish on the TRADE and TREND durations, despite droughts in Texas that are likely to result in 2 million less bales of cotton produced.  As Texas plants about ½ of the U.S.’s cotton, a large-scale failure could resuscitate price, though we’re bearish until we see price confirm the story.


Kevin Kaiser



Chinese Thirst for Portuguese Debt, Go Figure

Positions in Europe: Long Germany (EWG)


The FT broke a story last night that the Chinese are interested in buying Portuguese bailout bonds from the AAA-rated European Financial Stability Facility (EFSF) rescue fund. The news, added a boost to the EUR-USD pair, marginally dipped Portuguese bond yields, and presents another turn in the headline risk surrounding the region’s sovereign debt contagion threats.


The news harkens back to this January when both China and Japan vocalized their support to buy European peripheral debt. You’ll remember that Norway’s sovereign fund also bought PIIGS paper early in the year, yet unlike China has not recently voiced interest in doubling down on the bet. The WSJ also reported last night that China bought a total of €1.1 billion of Portuguese bonds this year, which have seen a loss of at least 10%.


However, the news of China’s support for Portugal comes at a critical juncture following the country’s €78 billion bailout: in mid-June Portugal plans to raise €3-5 Billion in 10YR bonds (in its first auction following the bailout decision on May 3rd) and ~ €5 billion of 5YR debt at the end of June to meet nearly €10 billion in debt coming due in June. Clearly this handshake should encourage demand at future issuances, but at what yield premium? We wouldn’t put our necks on the line here as downside risk (including complete uncertainty surrounding Greece’s medium term state) remains significant.


Below we show a familiar chart of 10YR bonds from the periphery as a proxy for the risk trade. Notably, Ireland pushed above 11% day-over-day on the 10YR, and confirms that bailouts in and of themselves are not elixirs—we continue to press that the pain of the region’s sovereign debt contagion has a tail of 3-5 years as counties attempt to re-write years of fiscal imbalances.


Chinese Thirst for Portuguese Debt, Go Figure - a1


As the G8 Summit meets in northern France today, just this morning Eurogroup President Jean-Claude Juncker commented that the IMF may not release Greece’s tranche next month if an audit of its budget accounting shows that the country cannot guarantee financing for the next 12 months.  The EUR-USD largely shrugged off the "shock and awe" news, however, the CHF-EUR pair is on a tear, as the safety trade ramps up once again and strong trade data from Switzerland this morning:


Switzerland Trade Balance 1.52 B CHF APR vs 1.0 B CHF MAR

Switzerland Exports 7.9% APR M/M vs -3.1% MAR

Switzerland Imports 4.0% APR M/M  vs 1.8% MAR


Chinese Thirst for Portuguese Debt, Go Figure - a2


Our EUR-USD immediate-term TRADE range is tight = $1.39-1.43, with $1.41 being its new TREND line of resistance that is just broken. The USDX’s mild intraday up move is also propelling EUR-USD weakness. No doubt this is a volatile currency pair! Stay tuned.


Chinese Thirst for Portuguese Debt, Go Figure - a3


Matthew Hedrick


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