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Le Greek Deluge

This note was originally published at 8am on February 21, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Apres nous, le deluge.”

-Madame de Pompadour


Greece Wins 2nd Bailout.” The Top 3 Most Read articles on Bloomberg this morning are about Greece. Great job by the world’s central planners. They have saved us from themselves, again.


Now what?


Not to be confused with one of the alleged prostitutes from the ex-Keynesian Chief at the IMF, Dominique Strauss-Kahn’s, “sex ring” this morning, Jeanne Antoinette Poisson (Madame de Pompadour) was big player in the French courts of 1740s France. As Chief Mistress to Louis XV, she had intimate edge on everything political that was going to happen next.


Short-term career risk management of conflicted politicians vs. Long-term globally interconnected what? Yes, it’s sad and pathetic to watch, even if that means we get a little short-term stock and commodity price inflation to lather us up somewhere in between.


My thoughts on what I call Duration Mismatch between long-term wants versus short-term political needs are not new. Never mind 18th century France or Rome in 49BC, this is 2012 baby. If you’re in the game of chasing short-term performance, you’ve just got to believe!


Or do you?


As our good ole counter-punching friend Friedrich von Hayek once said about Keynes and his throw-away line about “in the long-run, we are all dead”, “I fear that these believers in the principle of après nous le deluge may get what they have bargained for sooner than they wish.” (Keynes Hayek, page 186)


Back to the Global Macro Grind


While some of the world’s insider trading, tax evading, and prostitution ringing politicians of the Global Bubble in Keynesian Economics may want you to believe that “this time is different”, we still think that a Rising Price of Oil Slows Global Growth.


To be crystal clear, we’re not talking any price of oil. We like to talk about the price that’s being set on the margin. There has never been an oil price with a $100 handle per barrel that didn’t slow growth. Never is a long time.


Whether you look at Brent or West Texas crude oil, here’s what prices did last week: 

  1. Brent Oil = +2.0% to $119.58
  2. WTIC Oil = +4.6% to $103.24

Now, to be sure, there are a lot of things going on here like correlations, causalities, and Iranians – all at the same time - but the one thing that’s been consistent since Ben Bernanke’s Policy To Inflate (January 25th) are Inflation Expectations Rising

  1. Brent Oil (since January 25, 2011) = +9.1% (from $109.86/barrel)
  2. WTIC Oil (since January 25, 2011) = +7.6% (from $98.33/barrel) 

While it’s not clear to us why Old Wall Street’s economists and strategists have not yet cut their US GDP Growth forecasts for Q1 and Q2 of 2012 due to rising oil prices, it wasn’t clear to us why they didn’t at this time last year either.


Not to remind some of these perma-bull growth forecasters about the score, but last year plenty of them said that the price of oil crossing the Consumption Rubicon wasn’t going to matter. In fact, a lot of them said rising oil prices were a function of “accelerating demand.”


Oh, ok.


Someone might want to tell the Chinese about that…


Something (hint: Growth Slowing) is making the Chinese very nervous about this whole Global Money Printing thing. Nervous enough to cut the reserve requirement on banks for the 2nd time in the last few months. There are very few high-frequency economic data points coming out of China and/or Asia in the last week that don’t support this non-Greek headline of growth slowing sequentially.


But have no fear, Andrea Mitchell is here. Yes, as in the Maestro on these macro matters, Alan Greenspan’s, wife (and Foreign Affairs correspondent on everything NBC). On Meet The Press this Sunday Andrea called out that she saw “$5 Dollars for Supreme” at the pump.




“Apres nous, le deluge.” Sadly, maybe then, and only then, our elite central planners won’t have us pay for their taking car service to work.


After being long Consumer Discretionary (XLY) stocks for most of December-January (on Strong Dollar = Strong Consumption), I shorted the Sector ETF on Friday. My immediate-term support and resistance ranges for Gold, Brent Oil, WTIC Oil, EUR/USD, and the SP500 are now $$1730-1747, $116.89-120.56, $100.91-105.88, $1.30-1.32, and 1350-1363, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Le Greek Deluge - Chart of the Day


Le Greek Deluge - Virtual Portfolio





TODAY’S S&P 500 SET-UP – March 6, 2012

As we look at today’s set up for the S&P 500, the range is 10 points or -0.61% downside to 1356 and 0.12% upside to 1366. 












  • ADVANCE/DECLINE LINE: -586 (-427) 
  • VOLUME: NYSE 702.72 (0.40%)
  • VIX:  18.05 4.40% YTD PERFORMANCE: -22.86%
  • SPX PUT/CALL RATIO: 2.04 from 2.05 (-0.49%)


GROWTH – Small Caps, Basic Materials, Industrials – they’re all leading indicators inasmuch as Dr Copper and 10yr yields are – they are all telling us our model isn’t broken. The Old Wall’s is. Growth Slowing, globally, occurs because A) debt structurally impairs growth and B) inflation slows growth. Not from every time/price and debt levels – just these ones. 

  • TED SPREAD: 41.36
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 1.97 from 2.01
  • YIELD CURVE: 1.68 from 1.72 

MACRO DATA POINTS (Bloomberg Estimates):

  • No major U.S. economic releases scheduled
  • 7:30am/8:55am: ICSC/Redbook weekly retail sales
  • 11:30am: U.S. to sell 4-week bills, $26b 52-week bills
  • Noon: DOE short-term outlook
  • 4:30pm: API inventories


  • President Obama to hold news conference, 1:15pm
  • Obama meets with members of Business Roundtable to discuss jobs, economy, 7:10pm
  • Super Tuesday primary vote
  • House, Senate in session:
    • Senate Finance Committee holds hearing on tax overhaul options, 10am
    • House Appropriations subcommittee hears from SEC Chairwoman Mary Schapiro on its budget request, 10am
    • House Appropriations subcommittee hears from HHS Secretary Kathleen Sebelius on the agency’s budget, 2pm     


  • Super Tuesday primary day, with contests in states including Ohio, Tennessee, Georgia
  • Europe’s economy contracted 0.3% in 4Q as investment declined the most since 2009 and exports, consumer spending dropped
  • Private investors that have so far declared their participation in Greece’s debt restructuring hold ~20% of the bonds involved in a swap required for an international bailout
  • Google, Motorola Mobility must give Android data to Apple as part of patent lawsuit, judge ruled yday
  • AIG may have more flexibility to buy back its stock from the U.S. govt. after divesting holdings of AIA: Bernstein
  • Macau gaming revenue may grow at low double-digit pace in 2012, down from 42% in 2011: Macao Daily
  • Automakers prepare for deepening slump in European car mkt
  • Paulson’s Advantage Plus fund fell 1.5% in Feb., paring 2012 gain
  • Tornadoes that slammed 5 states last wk may generate as much as $2b in claims costs for insurers: Eqecat 


    • Bridgepoint Education (BPI) 7am, $0.38
    • Kronos Worldwide (KRO) 7am, $0.47
    • Bank of Nova Scotia (BNS CN) 7:28am, C$1.15
    • Dick’s Sporting Goods (DKS) 7:30am, $0.88
    • United Natural Foods (UNFI) 7:30am, $0.44
    • Vail Resorts (MTN) 8am, $1.38
    • Evertz Technologies (ET CN) 4 p.m., C$0.24
    • Linamar (LNR CN) 4 p.m., C$0.41
    • Pandora Media (P) 4:02 p.m., $(0.02)
    • Mako Surgical (MAKO) 4:05 p.m., $(0.14)
    • Provident Energy Ltd (PVE CN) 4:43 p.m., C$0.21
    • Paramount Resources Ltd (POU CN) Post-mkt, C$(0.25) 


COMMODITIES – Dollar Up = Deflates The Inflation; but it doesn’t all happen in a day. This should be bullish provided that the USD Index can hold its gains > $79.03 TREND line support – a Romney win tonight in Ohio could do it. What’s good for the USD is good for US Consumption. After snapping our TRADE line of 1735 last week, Gold testing TREND line of 1691 right now. 

  • Mitsui Seeks Copper With Record $17 Billion Cash: Commodities
  • Oil Declines on Growth Concern as Euro-Region Economy Contracts
  • Global Wheat Harvests Seen Declining From Record on Lower Yield
  • Copper Heads for Biggest Drop in 3 Weeks as Economies Contract
  • Gold Falls to 6-Week Low as Stronger Dollar Cuts Investor Demand
  • India’s Cotton-Export Ban Should Be Lifted, Minister Says
  • Sugar Falls as Surplus May Soon Become Available; Coffee Slides
  • India May Boost Iron Ore Exports to China After Freight Rate Cut
  • Gasoline Supply Drop Seen as Pump Prices Rise: Energy Markets
  • Billionaires Buy Gasoline Ships as Fuel Cargoes Expand: Freight
  • Silver Calls at Highest Since 2010 on Economic Recovery: Options
  • Google Runs Computers on Wind Power While Betting on Sun: Energy
  • Saudi Aramco Projects May Face Higher Loan Costs: Arab Credit
  • Cows Use More Corn Than Cars as Fuel Need Slows: BGOV Barometer
  • Wheat Falls Most in Two Weeks on ‘Significant’ U.S. Rainfall
  • China Won’t Import ‘Large Amounts’ of Corn on Stockpiles 












INDIA – after getting tagged for a -1.6% loss last week, down both days this week and down -6.8% since topping on Feb 21. With inflation running higher than nominal growth, this is what you get – modern stagflation. That’s why India’s Yield Curve has gone flat.










The Hedgeye Macro Team






CHART OF THE DAY: Risk Managing Non-Events


CHART OF THE DAY: Risk Managing Non-Events - Chart of the Day

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Risk Managing Non-Events

“The human mind does not deal well with non-events.”

-Daniel Kahneman


When you are me, analytical life can get lonely. Every single major Growth Slowing call I have made since 2007 has been met with doubt, denial, and disdain. But growth still slowed.


Whether I’m out for a run, on a plane, or in the shower, I’m constantly trying to re-think better ways to communicate our process. What is it that we do? How do we model our assumptions? What are the risk management signals?


Ultimately, I’ve come to the conclusion that I can always do better, but I can’t make it any more simple than stating it each and every day before it occurs. I’ll call this Risk Managing Non-Events.


Back to the Global Macro Grind


What is a Non-Event? You can ask Dan Kahneman for his definition – mine is that Non-Events are constantly occurring and tipping the slopes and probabilities of events becoming obvious.


Got tipping points? Consider the following Growth Slowing Signals in our globally interconnected Macro Model from the last month:

  1. Basic Materials Stocks (XLB) stopped going up on February 3rd, 2011 (now down -3.1% from YTD top)
  2. India’s Stock Market (INP) stopped going up on February 21st, 2011 (now down -6.8% from YTD top)
  3. Small Cap Stocks (IWM) stopped going up on February 23rd, 2011 (now down -3.1% from YTD top)

Those are obviously just leading indicators from big, liquid, stock markets. All the while, Copper, 10-year US Treasury yields, and Global Yield Spreads continued to flag what they started flagging immediately after the Ben Bernanke’s January 25thPolicy To Inflate to 2014 – Growth Expectations started falling as Inflation Expectations started spiking.


Overlay immediate-term leading indicators (real-time market prices, yields, and spreads) with our long-term Fundamental Research View that:


A)     Debt (when crossing 90% of GDP) structurally impairs long-term growth (Reinhart & Rogoff data supports this view)

B)     Inflation, from a certain time/price level, slows real (inflation adjusted) growth


All the while, have a Keynesian economist promise you that they can centrally plan just the right amount of “inflation” for just the right amount of employment and economic growth.


And you have yourself an “event” (versus consensus expectations) in the making…


Non-events are the proverbial grains of sand falling on the pyramid of risk that is our globally interconnected Macro Model. One by one, price by price, data point by data point, they fall onto the sand-pile of expectations.  


Then, one day… week… or month, they become “events.”


If the deep simplicity of Chaos Theory is this obvious, how do we almighty chosen ones from the Ivy League routinely get this wrong?


“A general limitation of the human mind is its imperfect ability to reconstruct past states of knowledge, or beliefs, that have changed.” –Daniel Kahneman (Thinking, Fast and Slow – page 202)


That’s why we have to humble ourselves and Embrace Uncertainty. The idea that going to Yale immunizes my mind from being human under pressure is as ridiculous as Bernanke not seeing inflation at $120 oil.


There may have been a day in this business, without internet connections or Twitter, that you could have legitimately had an information edge on a company and its implied valuation. A lot has changed since then. Today, my 4-year old son can pull up cash flow multiples with two clicks on Yahoo finance (provided that I give him the ticker!).


Risk Managing Non-Events is the next frontier of finance. Yes, it’s a lot harder to do than proclaiming our mystery of faith on the “right” earnings “multiple” for the SP500. That’s why we do it every morning. Risk never sleeps.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $121.12-123.98, $79.03-79.74, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Risk Managing Non-Events - Chart of the Day


Risk Managing Non-Events - Virtual Portfolio

PVH/WRC: Understanding Licenses is Key

Yesterday's press release confirms that PVH is indeed taking back the license for the ck Calvin Klein European apparel and accessories retail business from Warnaco in 2013 as originally announced last week. This may appear insignificant relative to the overall size of these businesses, but that’s not the case when you run through the numbers. In fact, this deal could provide a nice kicker to PVH earnings growth 3-4 years out to the tune of $8 in value added to PVH and $1 lost for WRC, which we don’t think the Street is focused on. As a result, this move is bullish for PVH and bearish for WRC over the near-term, though over the long-term we think this move is bullish for both.


This scenario is hardly new in retail, only the names and faces are different. WRC misses its minimum growth targets on the CK bridge line and underperforms. Then it loses the business because the licensee feels they can do better. Think JNY losing Lauren, Ralph, Polo Jeans and LIZ losing DKNY. Management teams always talk about the 'safety' of certain licensing agreements, but when a licensee is under pressure it will always invest in brands it owns, not licenses. We’ve seen this movie before. But here are some things to consider in this case:


  • For starters, the CK ‘bridge’ brand accounts for ~$100mm in revenues at breakeven for WRC including what is approximately a 7% royalty. That equates to ~4% of WRC’s total sales for 2011, which the company expects to largely replace with its CK Jeans business at higher margin. Take a look at the table below to see how this line stacks up to other CK licenses WRC operates for reference.
  • Assuming a normalized profitability in the LSD range, the loss of this license could be sized at roughly $1 in value (which presumably is already in the stock). 
  • The bottom-line is that this deal won’t have much of an impact on WRC losing a breakeven business and if anything will be net positive as the company removes the distraction and focuses on investing in its own content.
  • In addition to filling these stores with CK Jeans, WRC is likely to get more aggressive in growing its CK underwear line at retail, product it owns and doesn’t license and which accounts for ~50% of EBIT. 
  • At the aforementioned royalty rate of 7%, this business currently generates roughly $7mm in EBIT for PVH equating to ~$0.07 in EPS or 1% of PVH’s earnings. Bringing the line in-house should nearly double that out of the gate.
  • PVH highlights the opportunity to grow this CK line to a $500mm business over the next 5-7 years, but it’s important to note that we shouldn’t think of this growth in a straight line. Typically, when licenses are bought back in, the business are grown far more aggressively in the early years. Recall when RL brought the Lauren and Ralph licenses back in from JNY back in 2003.
  • So, let’s assume that when PVH brings this business back in-house in 2013 that it can get it close to $300mm by 2015 at 20% margin. That would equate to $0.60 in EPS. If we assume 25% margins, more in-line to the rest of PVH’s CK brand profitability, we’re looking at $0.75 in incremental EPS. With EPS over $9 in earnings power in 2015, that would take the CK ‘bridge’ line from 1% to accounting for nearly 8-10% of PVH’s earnings 3-4 years out, or about $10 in stock value at a 13x multiple. That equates to ~$8 in present value. A meaningful contribution to an $85 stock.we'd argue that this is probably not on the stock. 


Like its doing with its Hilfiger licenses, if PVH decides to get more aggressive in taking control over its own content and driving growth at its CK business, it will have investors thinking about $10 in earnings power 4-5 years out providing further upside. Investors that missed the strategic importance and magnitude of this when RL first started buying in its licenses are likely to consider this as PVH embarks down this same path.


Casey Flavin



PVH/WRC: Understanding Licenses is Key - WRC CK Table

Hedgeye Election Indicator Shows President Obama Ahead


Hedgeye Election Indicator Shows President Obama Ahead   - Screen Shot 2012 03 06 at 5.59.37 AM


The Hedgeye Election Indicator (HEI), a proprietary metric that uses real-time market and economic data to determine the probability of President Obama’s reelection chances, debuts today with a 116.9 reading, which equates to 58.4% chance that President Obama would win the US Presidential election if it were held today.


Hedgeye Risk Management, one of the leading independents research firms on Wall Street, developed the HEI over the past year to understand the relationship between key market and economic data and the US Presidential Election. We will release the HEI every Tuesday at 7 a.m. ET, beginning today all the way until election day Tuesday November 6.


After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, for example, like the relative strength of the US Dollar versus a basket of selected international currencies, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.  Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection. 



Hedgeye Election Indicator Shows President Obama Ahead   - HEI



The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The Hedgeye Election Indicator is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.