Defining Oxymoron: Management by Committee

Conclusion:  It seems unlikely that the Super Committee will reach their deadline of November 23rd.  Regardless, the debt ceiling will still get extended and automatic cuts will go into effect.  The later point is positive for our King Dollar thesis.

Position: Long the U.S. dollar via UUP; Short the EUR/USD via FXE

“I think this super committee is about as dumb an idea as Washington has come up with in my lifetime. I used to run the House of Representatives.  I have some general notion of these things. The idea that 523 senators and congressmen are going to sit around for four months while 12 brilliant people, mostly picked for political reasons, are going to sit in some room and brilliantly come up with a trillion dollars, or force us to choose between gutting our military and accepting a tax increase, is irrational.”


-          Former Speaker of the House and current Presidential Candidate, Newt Gingrich


As many of us who manage businesses or portfolios know full well, decision making by committee looks great on paper, but is typically ineffective in practice.  As if a committee wasn’t bad enough, the Joint Select Committee on Deficit Reduction (the “Super Committee”), which was created by The Budget Control Act of 2011, is comprised of twelve politicians (six from each party).   It should be no surprise then that the Super Committee is likely going to have a difficult time meeting its November 23rd deadline. 


In the table below, we’ve outlined the key members of the Super Committee, which is comprised of six Democrats and six Republicans.  Setting aside our legitimate concern that the Super Committee meetings are being held behind closed doors by non-democratically elected members of a sort of super Congress, we would be even more concerned if we believed the group could actually reach a resolution.   Given the highly partisan nature of Washington these days, we find it very unlikely that a compromise is reached or that any member of the Super Committee crosses party lines to reach a resolution.


Defining Oxymoron: Management by Committee  - 1. dj


According to InTrade, there is currently a ~15% chance that the Super Committee issues a recommendation by midnight on November 23rdon $1.5 trillion of cuts.  To be fair, and as outlined in the chart below, the odds have increased from 10% in early November, but still remain well off the 50% odds from mid-to-late October.  This implies worse than a 1/6 chance that a recommendation is made prior to the deadline.


Defining Oxymoron: Management by Committee  - 2. dj


The goal of the Super Committee is to agree on a plan for $1.5 trillion in deficit reduction over the next ten years by November 23rd.  According to


“This “Super Committee” can cut spending (including Social Security and Medicare), raise revenue, or propose a combination of both.”


In theory, the plan is then sent to Congress, where it is to be voted on by a simple up or down vote.  As such, it is not subject to amendments, “majority of the majority” blocks, or Senate filibusters.  After the simple majority votes in each house, the bill will then be sent to President Obama to sign.  The deadline for Congressional approval is December 23rd.


In the scenario that no agreement is reached by December 23rd, $1.2 trillion in spending cuts will be implemented across-the-board starting in January 2013.  (There would be no automatic revenue increases.)  These budget cuts are more commonly known as sequestration.   These cuts would exclude:  social security, Medicaid, veterans’ benefits, food stamps, and some other aid programs.  The key focus of these automatically implemented cuts would be the defense budget and discretionary spending, with a 50/50 split between each.  The White House has explicitly stated they will block any measures to water down the sequestration enforcement mechanism.


Preliminary estimates suggest if the automatically implemented cuts were to go into effect, a 7.8% average reduction would hit non-defense discretionary spending.   This is compared to annual growth rate of discretionary spending from 1971 to 2010 of 6.4%.  In fact, the only year-over-year decline occurred in 1996 with a -2.2% decline, which is highlighted in the chart below.  So, even if the Super Committee fails, the future deficit will improve on the margin.


Defining Oxymoron: Management by Committee  - 3. dj


In terms of impact on U.S.’s credit rating and potential for a default in the short term, a second debt ceiling increase of $500BN is scheduled to go into effect regardless of whether Congress passes the Super Committee’s proposal.  The process for the debt ceiling extension is that the President must request a further increase from Congress.  This request is subject to a motion of disproval.  The President can veto the motion and Congress can then override his veto by a two-thirds majority.   In all likelihood, this debt ceiling increase will pass.  Based on the projected deficit math, the second debt ceiling will allow borrowing to continue at current levels through the 2012 Presidential election, so there is no imminent risk of a downgrade on this basis.


The emerging outcome for the Super Committee seems to be some form of a two-step process given the current divide between Republicans and Democrats on the Super Committee.  In fact, Republican co-chair Texas Rep. Jeb Hensarling stated as much on CNN when he said:


“There could be a two-step process that would hopefully give us pro-growth tax reform.”


Not surprisingly, the divide is squarely across partisan lines with the Republicans currently unwilling to accept any increase in taxes and the Democrats just as unwilling to accept any major alteration in entitlement spending.  Indeed, while the Republicans have offered a proposal of $1.4 trillion in deficit reduction, it includes $500 billion in new revenue from capping individual deductions while cutting all six income tax rates by 20%.  In addition, it would extend the Bush-era tax cuts.


As is typical for politicians, the likely outcome of the Super Committee is that the can will be kicked down the road, even if they reach some two-step compromise.  As previously stated, though, this is not all negative as the deficit enforcement mechanism will kick-in, which is, on the margin, positive for U.S. deficit reduction.


Daryl G. Jones

Director of Research

Today’s European Data by the Charts

Positions in Europe: Short EUR-USD (FXE); Short France (EWQ)

French Risk Rising: Below we update our chart of French 5YR CDS and the spread between France’s 10YR bond yield and bunds. In both cases, we continue to see higher highs since the EUR was introduced. We remain short France via the eft EWQ in the Hedgeye Virtual Portfolio due to:

  • French debt could peak at 92.3% of GDP in 2013 (over the Reinhart &Rogoff 90% level that impedes growth), especially if the state has to take on more of the bank recapitalizations. Rough estimates suggest that France’s four largest banks need to raise over 40 Billion EUR to reach the 9% core tier 1 capital ratio.
  • A lofty schedule of debt maturities (+200 Billion EUR over next 6 months) and higher trending yields will make raising debt more expensive and put upward pressure on debt. France has the largest banking exposures to Italy of any country and has yet to significantly mark down its PIIGS paper.
  • GDP will take a hit, already revised down from 1.75% to 1% for 2012 by President Sarkozy. We think Austerity’s Bite and a prolonged effort by Eurocrats to keep the Eurozone fabric together will create an extended period of downside economic and market performance.  
  • A higher French unemployment rate (nearly 3% above Germany's) and the inability to drive economic growth through exports (like Germany) should prolong weakness in French fundamentals as stagflation takes hold into year end and in 2012.
  • A huge risk remains the downgrade of France’s AAA credit rating, including jeopardizing the EFSF, a facility that is built on its AAA credit rating to raise debt at “cheap” levels, and of which France is the second largest contributor.

Today’s European Data by the Charts - 1. g



German GDP Slowing: Like much of the Europe, we expect German growth to slow over the next 4 quarters. A look at the chart below shows that from a comparative perspective, Germany will have tough comps on a quarter-over-quarter basis for Q4 (bumping against +0.5%) and should have 4 tough quarterly comps on a year-over-year basis (circled in red below in the chart).


Further, readings from ZEW’s Economic Sentiment survey that is 6 months forward looking (yellow line in the second chart below) suggest similar downward pressure, recording a 3-year low of -55.2 in November.


Today’s European Data by the Charts - 2.g


Today’s European Data by the Charts - 3. g



UK’s Sticky Stagflation: As the chart below demonstrates, UK inflationary metrics are running high (most current reading down 20bps vs the previous month at 5.0% in Oct. Y/Y), which will further crimp growth. For the UK, a fall in energy prices could materially depress many of these readings and could be its saving grace.  


Today’s European Data by the Charts - 4. g


Matthew Hedrick

Senior Analyst

Beta's TAIL: SP500 Levels, Refreshed



It’s both impressive and scary that the SP500 is hanging out up here in no man’s land.


Impressive is as impressive does (until it doesn’t). And scary because both volume and volatility signals in my model are signaling things can unwind back down to 1237 in short order (like they did pre-open).


Across our 3 core risk management durations, here are my lines that matter most: 

  1. TAIL (resistance) = 1269
  2. TRADE (resistance) = 1254
  3. TREND (support) = 1237 

On the downside, snapping 1237 would bring on a whole host of different issues. Stay tuned on that. I’ll let the market tell me what to do when/if we get there.


In the meantime, get the US Dollar right, and we think you’ll get most things beta right.



Keith R. McCullough
Chief Executive Officer


Beta's TAIL: SP500 Levels, Refreshed - SPX

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Retail Sales v Consumption

We saw a really nice 200bp Retail Sales improvement for the month of August. While there's every reason to be excited about positive signs from the consumer, there's one very important thing to keep in mind...


Over much of the past year, our model suggests that 'discretionary' consumption has been running +4-5%. We define 'discretionary' as everything that is not needed to live day to day. We build up to a personal consumption number, and back out these 'essential' spending levels. Whatever is left is our discretionary spending. 


The interesting call-out is that we're entering a 5-month period where discretionary spending is likely to be down, marking a 500-600bp sequential erosion in spending rates.


The option, of course is for the consumer to take personal savings rate towards zero again -- though leverage levels and declining home prices are likely to nip that one pretty quickly.


We're not preaching gloom and doom here. But simply that it is pretty much useless to use hindsight in forecasting what the consumer will look like six months down the road.


Retail Sales v Consumption - 11 15 2011 9 32 04 AM


Retail Sales v Consumption - 11 15 2011 9 31 21 AM






Retail sales less autos and gas for October came in better-than-expected at +0.7% month-over-month.  Consensus was expecting a +0.2% increase from September.


Soft employment trends among young males are causing QSR chains to rethink their marketing strategies (link).





THE HBM: DNKN, MCD - subsector fbr





DNKN: Dunkin’ Donuts K-Cups did not fare well in a recent review on 


MCD: The McDonald’s PT was raised to $106 from $100 at Sterne Agee.  The firm also reiterates a Buy rating on the stock.


THE HBM: DNKN, MCD - stocks 1115



Howard Penney

Managing Director


Rory Green


DKS: Trumping Expectations


Solid results out of DKS this morning ($0.32 vs. $0.27E) reflect accelerating sales strength we’re seeing in the athletic specialty channel – good for NKE & UA and FL & FINL. Following two quarters in a row where the company came in below its comp guidance it trumped both guidance (+1%-2%) and expectations (+2%) in Q3.


Here a few callouts from Q3:

  • In addition to a reacceleration in sales on both a 1yr and 2yr, the company’s comp (+4.1%) came in above guidance is notable given its missed expectations in each of the last two quarters.
  • The composition of DKS’ comp was also impressive with Golf Galaxy up +2.4% despite others citing weakness in the category and e-commerce up +17% on a +82% comp reflecting solid acceleration in underlying 2yr trend
  • The company has posted a positive sales/inventory spread and operating margin growth for seven consecutive quarters – one of the more stable recent records of note in retail
  • Inventories up +7%, up only 0.1% per sq ft. with 19 stores opened in the qtr reflecting a healthy athletic channel – good for NKE and UA.
  • Gross margins were up +126bps reflecting continued mix improvement and strength in the channel i.e. lack of promotional activity.
  • SG&A up +7.1% was leveraged on higher sales – we expect continued leverage in Q4
  • Company raising Q4 outlook by a penny on comp guidance that looks acheivable.


Call at 10am at


Casey Flavin



DKS: Trumping Expectations - DKS CompGuid


DKS: Trumping Expectations - DKS SIGMA



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