People Minimize Debt

This note was originally published at 8am on June 21, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Unlike neoclassical macro theory, which assumes that private-sector corporations are always maximizing profits, it assumes that some companies may respond to daunting balance sheet damage by minimizing debt.”

-Richard Koo


I’m in the middle of reading Richard Koo’s revised edition of “The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession.” The aforementioned quote summarizes Koo’s thoughts on what he coined in another book as a “Balance Sheet Recession.”


This morning, ahead of this Greek confidence vote, I want to do a little extending and pretending of my own with Koo’s conclusions – you know, just to get the intellectual juices going.


Let’s pretend for a moment that the American Consumer is Koo’s “private-sector corporation.” Then, let’s extend ourselves into the fictional land of nod and go as far as to assume that people, instead of companies, minimize debt when you scare the hell out of them.


I know, I know. This Mucker guy is coming up with some radical economic theory over here on the east side of Yale’s campus. But, seriously, I didn’t need to get into this academic institution to be told how to think.


Lessons from The Greek Gong Show: America needs to re-think, re-learn, and re-consider what makes this economy tick. It’s not that complicated. First, we need to stop what we are doing and get back to the basics of human behavior.


Behaviorally, if you want to scare the hell out of people, just fear-monger about “Great Depressions.” That’s Bernanke’s bailiwick. That’s why Washington loves him. That’s why he was appointed by a modern day Republican and cheered on by a modern day Democrat.


Modern day Western economics are partisan. Both Republicans and Democrats pin their hopes on Keynesian economists. Hope, alas, is not a long-term risk management process. Both Bush and Obama had to learn this lesson the hard way. Bernanke’s “confusion” and “frustration” with the economy is finally breeding contempt.


As Koo appropriately notes in the Preface of his 2009 Edition of “The Holy Grail of Macroeconomics”, “I realized that no constructive discussion could occur until I proved that some of the “lessons” from the Great Depression that underpin their views are themselves wrong.”


Koo’s realization is an extension of Nasim Taleb’s idea of a “Narrative Fallacy ( “The Black Swan”, 2007), where Taleb alludes to humans having a propensity to build stories around facts.


The fact of the matter is, and I’ll say this for a 3rd time this morning, when you scare the hell out of them, People Minimize Debt.


Again, people are different than countries – particularly socialist ones. Only a moron would look to solving his or her solvency problems by Piling More Debt Upon Debt, like Greece, Japan, and America have.


Back to this morning’s reality show of extend and pretend, here’s what the Fiat Fool in Chief of Greece had to say this morning ahead of the Greek confidence vote:


“We are determined as a country, as a government, to be on track with the program, to move forward, to do what is necessary, in order to put our country into a fiscally much more viable position.”


Seriously. This guy is serious about maximizing debt until he blows his country’s balance sheet, bond, and stock markets to smithereens.


Global Markets are obviously very nervous about lying Greek politicians. Never mind what the Greek stock and bond markets do today. Don’t forget that the Greek stock market was down -35.6% in 2010 and has crashed, again, down another -27% since rallying to lower-high in February 2011. Markets discount future events.


What got us here is something I have been writing about since 2007. What is going to get us out of it isn’t doing more of what’s imploding the Greek, Portuguese, and Irish markets – Politicians Maximizing Debt.


In the meantime, the entire world is watching and Global Growth Is Slowing. This is largely a function of people being afraid. In the real world, confidence matters.


That’s why US demand for mortgages, stocks, and commodity exposure is falling. That’s why US stock market volumes have been bone dry on this 3-day rally to lower-highs. It’s the Debt Maximization Experiment of the Keynesians, stupid.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1532-1548 (we remain long GLD), $91.29-97.63 (we remain on the other side of the Goldman Oil Bulls), and 1259-1291 (we have no position, but a bearish bias at the top end of the 1291 range).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


People Minimize Debt - Chart of the Day


People Minimize Debt - Virtual Portfolio

Chinese Cowboy

“We ride and never worry about the fall – I guess that’s just the cowboy in us all.”

-Tim McGraw


My Thunder Bay Bear boys and I are big country music fans. Tim McGraw’s “The Cowboy In Me” is one of our favorite songs. I’ll be heading up to the homeland for some time with the family tomorrow. I’m looking forward to slaying the great Canadian Walleye with my buddies Luch, Gunner, and RM.


The Cowboy In Me” hit #1 on the Billboard Hot Country Singles charts immediately after McGraw’s duet with Jo Dee Messina “Bring On The Rain” did in 2001. Sometimes a bear needs a lot of rain before he gets hungry to buy.


I bought Chinese stocks (CAF) on June 16th … and I must say, not many people agreed with that. I actually don’t think I agreed with it either. But I bought them anyway.


“The things I’ve done for foolish pride

The me that’s never satisfied”


That’s a small part of the why. Most people who know me well know that I love to compete. Sometimes that’s hurt me in this business. Most of the time it’s been my greatest asset. During the sometimes that it isn’t – it’s usually because I am letting my pride get in the way of my process.


“Sometimes I’m my own worst enemy

I guess that’s just the cowboy in me”


Back to the Global Macro Grind


This morning’s bullish immediate-term TRADE action in Asia was led by the biggest rally Chinese stocks have seen in 4 months. The Shanghai Composite Index was up a big +2.2% (up for the 4th consecutive day).




The actual data was bad (the HSBC PMI print came in at 50.1, an 11 month low). But bad data in China isn’t new. The leadership call to action of Chinese Premier Wen last night was. Away from the #1 Bloomberg headline this morning being some version of European socialist hope for Greece, one of the   “Most Read” stories was about the Premier’s comments about Chinese inflation:


“I am confident prices will be firmly under control this year.”


Now I typically don’t believe a Chinese politician inasmuch as I don’t trust an American one, but the actual inflation data we’ve been modeling into our Chinese Consumer Price Inflation (CPI) forecast for the back half of 2011 is in line with Premier Wen’s forecast.


On the 2 things that really matter to Chinese stocks – Growth and Inflation – here’s Hedgeye’s call for the 2nd half of 2011:

  1. Growth Slows At A Slower Rate (+7-9% GDP growth instead of 10-12%)
  2. Inflation Starts To Deflate (4-5% CPI instead of 5.5-6.5%)

If we are right on Growth and Inflation, the only big thing left to solve for is Monetary Policy. Premier Wen’s comments also have a huge implication for Chinese interest rates – Deflating The Inflation (Hedgeye Q2 Macro Theme) means he can STOP raising rates!


On Chinese Monetary Policy, here are the facts:

  1. China has raised interest rates 4x during La Bernank’s policy to inflate cycle
  2. China has not raised interest rates in 11 weeks
  3. China’s swap spreads are already discounting an arrest of interest rate hikes

So what does The Cowboy In Me do with that?

  1. I BUY Chinese stocks (CAF)
  2. I SELL Chinese currency (CYB)

If my Macro Team continues to be right that:

  1. The US Dollar is done going down (for now)
  2. The CRB Commodities Index and Oil are going to keep going down (for now)

Then Premier Wen and I are probably going to be right. Deflating the Inflation in the CRB Commodities Index and WTI Crude Oil has been -10.8% and -19.5%, respectively since May.


Deflating The Inflation will be good for US Consumers inasmuch as it will be for Chinese consumers. Between now and then, Chinese stocks have much more upward potential to this trade than US stocks do. The SP500 is still lathered with The Inflation Trade (Financials, Energy, Basic Materials), and The Correlation Risk to US Dollar UP is much more severe to the SP500 than it is to the Shanghai Composite.


Does my craw constantly consider the time and price relationship between being long China (CAF) and short US Equities (SPY)? Of course. Managing risk in the most globally interconnected marketplace that investors have ever faced is the game that we are in.


But I won’t wake-up every morning worried about the guys who are playing this game with hope and fear as their governor. I have enough on my plate in not letting my pride get in the way of my own process.


“The face that’s in the mirror when I don’t like what I see

I guess that’s just the cowboy in me”


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1511-1532, $90.44-95.11, and 1, respectively.


Enjoy your weekend and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Chinese Cowboy - Chart of the Day


Chinese Cowboy - Virtual Portfolio

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TODAY’S S&P 500 SET-UP - June 24, 2011


Hedgeye’s most controversial LONG idea is being long China (long the CAF since June 16th). What's interesting about the debate is that the people who tend to disagree with me are still bullish on US Equities. To me, that makes no sense; if you are that bearish on Chinese demand, after the market has gone down for 15 months, how can you be bullish on anything equities?


China was up another +2.2% overnight and up for the 4th consecutive day (higher-lows).  Meanwhile European stocks and US futures are rallying to lower-highs this morning.  In the FX market, my Euro 1.42 line continues to be my line in the sand (intermediate-term TREND line); if it breaks, mostly everything else that's trading inversely to the US Dollar will. Conversely, If EURO 1.42 holds, the US and Western European Equity bulls get to live to play another day.


As we look at today’s set up for the S&P 500, the range is 39 points or -1.91% downside to 1259 and 1.13% upside to 1298.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -486 (+35)  
  • VOLUME: NYSE 1117.47 (+30.49%)
  • VIX:  19.29 +4.16% YTD PERFORMANCE: +8.68%
  • SPX PUT/CALL RATIO: 2.41 from 2.01 (+20.04%)



  • TED SPREAD: 24.14
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.93from 3.01
  • YIELD CURVE: 2.58 from 2.62 



  •  8 a.m.: Richard Fisher, Dallas Fed president, speaks on Bloomberg TV
  • 8:30 a.m.: Durable goods, est. 1.5%, prior (-3.6%)
  • 8:30 a.m.: GDP, 1QT, est. 1.9%, prior 1.8%
  • Noon: Treasury Secretary Geithner meets with business leaders in NH, speaks at Dartmouth at 4 p.m.
  • 1 p.m.: Baker Hughes rig count
  • 3 p.m.: USDA hog inventory


  • Fed Chairman Bernanke’s viewed favorably by 30% surveyed in Bloomberg National Poll, lowest in 2 yrs of polling on issue
  • New York, California said to start antitrust investigation of Google, along with Texas and Ohio
  • EU leaders pledged to stave off a Greek default as long as Prime Minister Papandreou pushes through a package of $111b in budget cuts next week
  • Breakdown of deficit talks puts onus on President Obama, House Speaker Boehner to bridge partisan differences before Aug. 2 deadline
  • China to Cut Import Tariffs on Some Oil Products, Zinc, Alloys



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Sarkozy’s Fight Against Agriculture Speculators Moves to Finance Ministers
  • Commodities Rebound From Four-Month Low Amid Speculation Demand to Climb
  • Oil Rises on Concern IEA Emergency Crude Release May Limit Future Supplies
  • Pasta Price May Surge as Swamped North Dakota Cuts Supply of Durum Wheat
  • Copper Advances for First Day in Three as Commodities Rally After Selloff
  • Sugar Mills in India Seeking More Exports May Widen Supplies, Lower Prices
  • Gold May Rebound From Slump as U.S. Interest Rate Policy Increases Demand
  • Palm Oil Set for Worst Run of Losses Since January 2010 After Crude Slumps
  • Korea Said Buying Corn as Price Rebounds From Lowest Level in Three Months
  • Cotton Demand in India May Miss Estimate as Textile Mills Lower Production
  • Corn Rebounds From Lowest in Three Months Signs of Improving Global Demand
  • U.S. Leads Emergency Oil Release as Price Surge on Libya Threatens Economy
  • Gold Demand in China to Grow at Least 20% in 2011, Association Tells Daily
  • Gold May Advance Next Week on Europe Debt Woes, Fed Policy, Survey Shows




THE HEDGEYE DAILY OUTLOOK - daily currency view




  •  EUROPE: Germany +1.6% (were long) holding steady above my support line of 7166 this morn on better than bad data; Spain +0.96% (were short)
  • The euro-area debt crisis poses the biggest risk to the stability of the U.K. financial system and banks should build up capital when earnings are strong, BoE said today in the minutes of the June 16 meeting of the new Financial Policy Committee.


THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: awesome week for us being long China - up +2.2% overnight making it 4 consecutive up days and a very nice hedge against short USA.

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

DKS: Shorting for a TRADE


Keith re-shorted DKS in the Hedgeye virtual portfolio today with the stock back up at its TRADE line of $37.99. Our thesis remains unchanged. While we don’t think the fundamental story is broken, we continue to be concerned near-term with the Street above management’s guidance for the quarter implying a sequential acceleration in business.


DKS: Shorting for a TRADE - DKS VP 6 23 11



R3: Get High




June 23, 2011








There’s No Such Thing As Bad Publicity? Maybe Not...


I wonder if Boston Mayor Thomas Menino realizes that he’s really elevating Nike’s marketing message rather than dousing the flame by his recent demand that Nike removes its ‘Get High’ and ‘F#%@ Gravity’-shirts from the store window at the Back Bay Niketown. This smells a bit like the launch of Nike’s ‘Just Do It’ campaign.  Most notably, the campaign focuses on the action sports consumer – surf, skate, and xtreme sports. Expect to hear a LOT about that at Nike’s analyst day on Tuesday.


R3: Get High - R3 2 6 23 11


Just as soon as we think that there’s no such thing as bad publicity, we see the picture below from our pals in the Great White North.  Probably not how LULU wants its brand advertised.


R3: Get High - R3 6 23 11




Li & Fung Buys Loyaltex Apparel, British Beauty Co. - Hong Kong-based sourcing giant Li & Fung Limited said Wednesday it has made a series of acquisitions including Loyaltex Apparel and British beauty company Collection 2000. Li & Fung, which has been embarking on a shopping spree over the past couple years, also said it has bought Thailand-based furniture company Exim Designs and TVMania, a European supplier of character-braded apparel with a license portfolio including Hello Kitty, Mickey Mouse, Barbie and Sponge Bob. Li & Fung reiterated that it has acquired Hampshire Designers, the women's division of Hampshire Group Limited in the United States. That deal was originally announced last month. Li & Fung said the turnover and pre-tax profit of the five acquired companies were about $660 million and $80 million respectively for the last year. <WWD>

Hedgeye Retail’s Take:  Think about it…this company has sales of about US$12bn. That’s predominantly at what we know as the COGS line over here.  You want to know what the boggest apparel company in the world is? Look no further.


Skechers Forms Branded Virtual Goods Partnership - Virtual Greats announced they will partner with Skechers to produce and distribute branded virtual goods in various online social media destinations. As one of the leading virtual goods sales and distribution agency, Virtual Greats has already secured distribution for Skechers' branded virtual goods with and WeeWorld, two top social media sites for teens and women.A range of both Skechers Women's and Men's shoes from the 2011 collection, currently available in stores, will be offered in the online branded boutiques. While this first set of branded virtual goods will be fashion-based, plans for future Skechers-branded releases include enhanced avatar performance and fitness levels within the social gaming world, based on Skechers' fitness products. WeeWorld launched select Skechers assets at the end of May 2011, while Skechers-branded products premiered in boutiques this month. <SportsOneSource>

Hedgeye Retail’s Take:  Tread lightly here. First fix the core problems, then worry about doing high-end limited distribution (and unprofitable) product. There will be a time to buy SKX. But simply not now.


New Fashion Push in Kmart Campaign - Kmart’s new soft goods advertising campaign has a tall order to fulfill: give the beleaguered retailer’s fashion and home businesses a new image that’s at once authentic and aspirational. Minneapolis-based ad agency Peterson Milla Hooks created a campaign that gives Kmart a new logo, new message and new vibe. “We felt [PMH] understood style and fashion and were creative out-of-the-box thinkers,” said Tara Poseley, senior vice president and president of Kmart apparel at Sears Holdings Corp. “We want to get out the message that we have amazing fashion.” PMH helped Target put the aspirational into its apparel, but Poseley claimed she wasn’t aware of the connection until after PMH was selected by Kmart. Clearly, Kmart is after the same effect. “We do want this be aspirational,” Poseley said. “That’s part of getting people to come into Kmart.”  <WWD>

Hedgeye Retail’s Take:  This is going to sound like a very arrogant statement, so excuse me. But Can you think of a more challenging job than being the head of apparel at K-Mart? “…we have amazing fashion…We want to be aspirational.” Yeah, and I (McGough) want to be in the starting lineup for the Miami Heat, but it’s not gonna happen.”


Retailers Upbeat on Fall Sales Outlook - It’s shaping up to be a good fall for men’s wear. After a strong holiday and spring, where men’s apparel sales outpaced other categories, Father’s Day provided another solid boost to business, buoying the spirits of retailers as they approach the start of the all-important fall and holiday selling period. Many merchants posted double-digit gains for the period, with casual sportswear items such as knit shirts, lightweight sweaters and shorts leading the way. Interestingly, many stores also saw strong sales of tailored clothing — proof that men are out there shopping for themselves. According to the National Retail Federation’s Consumer Intentions and Actions Father’s Day survey, conducted by BIGresearch, Americans were expected to spend an average of $106.49 on Dad, up from $94.32 last year and the most in the survey’s eight-year history. Total Father’s Day spending was expected to reach $11.1 billion. “Shoppers seem to be more excited when it comes to gift giving, an encouraging sign for retailers — and dads – everywhere,” said Matthew Shay, president and chief executive officer of the NRF. <WWD>

Hedgeye Retail’s Take:  Can’t really explain this one, other than to say that as punitive as we be about the spending habits of the American Consumer, they rarely sacrifice much in the gift-giving arena. It’s the incremental ‘purchase for me’ that is the make-or-break. Also, how in the world retailers could be upbeat on Fall sales outlook based on Father’s day is beyond me.


Zegna Adds Dimension to Shopping Experience - Why should e-boutiques offer a flat perspective on shopping?Virtually replicating in 3-D a two-story brick-and-mortar Ermenegildo Zegna store, with rooms to wander through and steps to mount, the Zegna in_STORE 3-D digital portal — which goes live tonight — is anything but. Developed with Hollywood-based visual-effects specialist James Lima, who consulted on the 3-D blockbuster “Avatar,” the Zegna e-store offers visitors a real-life spatial, visual and experiential shopping experience using immersive 3-D technology. Computer graphics in three dimensions were used to make the store look photo-real, with the same furnishings as in the brick-and-mortar Ermenegildo Zegna stores. The free Zegna in_STORE application will launch on iTunes and on Zegna’s Web site and Facebook page. It’s geared to iPads and iPhones, and other versions are due to be added in the coming months. <WWD>

Hedgeye Retail’s Take:  This is similar to Ralph Lauren’s ‘4-D’ reopening of the NY Flagship (with the fourth dimension being smell). Zegna sounds like it’s going even more Hollywood.




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