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Economic Identities

“There is, so I believe, in the essence of everything, something that we cannot call learning. There is, my friend, only a knowledge - that is everywhere.”

-Herman Hesse


Last week I was on vacation and had some time to turn off the crackberry (or iCrackberry in my case) and do some reading.  Most of my reading was centered on my day job as Director of Research at Hedgeye, but I also had a chance to read some fiction, including Hermann Hesse’s classic, “Siddhartha.”


For those of you that haven’t read Hesse’s novel, it is the classic example of a man’s search for meaning and identity.  In the story, the protagonist, Siddhartha, lives in the time of the Buddha and is in search of enlightenment.  On this path, he forsakes his family as a teen and leaves a comfortable lifestyle to the sparse life of an ascetic that is characterized by abstaining from worldly pleasures.


Siddhartha then has an awakening of sorts and leaves the ascetics to become a trader (in this day and age he would clearly have been trading CDS), and also takes on a lover.  Siddhartha then again turns his back on the materialistic world to once again return to the ascetics.  Eventually Siddhartha realizes that that his “understanding” is enhanced by the collection of his experiences.


From my purview, this short novel is the classic existential angst and search for identity story.  In people, this often occurs years immediately following college, but also manifests itself in the “midlife crisis.”  Nation states also struggle in the search for identity.  In the United States this struggle has recently been on the social side of the equation as both Republicans and Democrats have taken up the gay marriage debate with fervor, but in Europe the search for identity continues along the economic path.


This morning's GDP numbers were released for the majority of the Eurozone.  In the Chart of the Day, we’ve highlighted the y-o-y GDP growth rates for the EU-27.  While the architects of the euro may have envisioned a scenario where economic progress is shared across the region, the reality has proven to be much different.  Clearly, Germany has been, and continues to be, the key beneficiary of the common currency. This will only continue with the euro trading below the 1.30 line versus the U.S. dollar.


In aggregate, the EU27 grew 0.0% from Q4 2011 and 0.1% from Q1 2012.  This was largely driven by Germany, which grew at 0.5% sequentially and 1.2% y-o-y.   Germany has benefitted from strength in its industrial sector, in particular solid results from the automakers.  As a result, exports have been a meaningful tailwind for Germany.


On the disappointing end of the GDP report were France, Italy and Spain.  France’s growth effectively evaporated on a sequential basis to 0.0%, and Italy was -0.9% sequentially while Spain was down -0.3% sequentially.  Clearly, Europe is seeing the impact of austerity in short-term GDP growth numbers.  The open ended question remains how tolerable austerity remains, especially as Germany’s economy continues to dramatically outperform its neighbors.


To answer that question, we probably have to look no further than Francois Hollande’s first action as leader of France.  Specifically, immediately after being sworn in today Hollande is flying to Germany to discuss a growth pact with Angela Merkel.   While Merkel has been adamant that no new sovereign debt will be issued to support growth, she too is feeling the pressure to implement policies that are, at least in perception, more pro-growth by her political opposition in Germany.  The economic identity crisis in Europe continues.


The European sovereign debt markets are clearly signaling their confusion around the lack of economic identity.  While they had seemingly been reacting better to certain austerity policies, many periphery yields are now trading back near all-time highs.  The key market we watch, of course, is the Spanish 10-year yield which is now solidly above the rhetorically critical 6% line at 6.25% this morning. 


With France’s political identity resolved, at least temporarily, Greece is now in focus on the political front.  My colleague Matt Hedrick highlighted this on Friday when he noted:


“This week saw each of the three main Greek parties (New Democracy, Syriza, and Pasok) try to form a coalition with each another, only to come up short each time. There’s new hope from some that Pasok leader Evangelos Venizelos can put together a unity government given a shift in stance on the part of Democratic Left leader Fotis Kouvelis, who has broken ranks with Syriza, which it had backed earlier in the week. (Syriza is thoroughly against the mandates of austerity, and may be the most divisive partner in a coalition build).”


Clearly, the search for political identity in Greece is going to be protracted.


Changing gears for a minute, I wanted to highlight a recent note from Howard Penney and Rory Green on our restaurants team titled, “The (Coffee) Prince”.  As they wrote:


“For Howard Schultz, it is all about winning.  Even when he doesn’t want to communicate it, he does.  The word “Machiavellian” has come to represent, for many people, any human behavior that is cynical and self-interested.  While Schultz seems to have a strong social conscience – and this is meant as a compliment – we can’t help but believe that the single-serve strategy being employed by Starbucks seems to rhyme with The Prince, Machiavelli’s most famous book.  An appearance by Mr. Schultz on CNBC yesterday illustrates this perfectly.”


Their general point, and email if you want to trial their research and read the entire note, is that the identity, or search for identity, of corporate leaders can very much impact financial results.



Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research








Economic Identities - Chart of the Day


Economic Identities - Virtual Portfolio

DKS: Quick Hit - We Still Like It


Solid quarter from DKS coming in $0.07 above the top end of its range and consensus expectations. Revenues came in strong up +15% a little better than our expectation for +14%E and the consensus of +10.5%E, but the real callout in the quarter is inventory management reflected in better than expected gross margins.

  • Inventories were up +14% on +15% sales growth resulting in an 8pt improvement in the sales/inventory spread, but more importantly a return to positive to +1%. The negative spread posted last quarter due to excess cold weather product was DKS’ first in over 3-years since Q3 ’08. The company’s ability to clean the decks headed into Q2 is impressive.      
  • Equally impressive is the gross margin improvement up +112bps on stronger sales despite clearance activity and higher equipment sales mix.
  • It’s also worth noting that both Dicks and Golf Galaxy comps accelerated on a 1yr and 2yr basis this quarter. We’ll get more color behind the drivers at Dicks, but Golf Galaxy came reflected the strength we’ve seen in the golf channel YTD.
  • The increase in full-year EPS to $2.45-$2.48 from $2.38-$2.41 reflects Q1 coming in $0.07 above the high end of Q1 outlook and comp expectations up to +3-4% from +2-3%. These expectations continue to look flat out conservative to us.

Call at 10am


Casey Flavin



DKS: Quick Hit - We Still Like It - DKS S



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Back To Bed

This note was originally published at 8am on May 01, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We are in bed too much.”

-Franklin D. Roosevelt


That classic FDR quote comes from a dramatic excerpt in Ian Toll’s latest book about WWII, The Pacific Crucible. If you are a history buff, I highly recommend it. The book is very well researched and provides a unique Japanese perspective on how they forced Americans to think differently about globally interconnected risks.


The context of the quote is important. FDR said it in the immediate aftermath of Pearl Harbor when being grilled by Senator Tom Connolly of Texas, “How did it happen that our warships were caught like tame ducks… How did they catch us with our pants down? Where were the patrols.” Roosevelt replied, “I don’t know, Tom. I don’t know.” (page 31)


Unlike most modern day Republican and Democrat “leaders”, Roosevelt didn’t point fingers. He went on to explain that it wasn’t enough not to know. It was time to take the time to re-think US strategy and understand. “They are doing things and saying things during the daytime out there, while we are all in bed.” (page 31)


Back to the Global Macro Grind


If you want to pretend it’s the 1990s or 2003-2007 bull markets, that’s cool. All you have to do is know where the 50-day moving average is and you won’t miss a thing. Just look at the US Equity futures every morning and go back to bed.


With the US Dollar being debauched (down now for 7 of the last 8 weeks), Risk Managers are starting to pick up on the idea that more QE would only inspire a weaker World Reserve Currency and higher oil prices. That, in turn, will slow growth further.


QE1 may have worked. But QE2 didn’t, and QE3 definitely won’t. Why? Because as the USA gets a short-term “pop” in stock prices, the rest of the world gets asset price inflation (i.e. in their cost of living and/or cost of goods sold) right when they need that the least. Policies To Inflate (from these prices) slows growth and compresses margins.


Global Equity markets have obviously figured this out. With the exception of Venezuela and Egypt, Global Equity prices have been making lower- highs since February-March. The slowdown in US Equities (which somehow were last to figure this out) was much more pronounced in April than it was in that February-March performance period.


Performance period? Qu’est-ce que c’est le performance chasing period? It’s been glaringly obvious that seasonal Institutional performance chasing has called the top in US Equities in Q1 of 4 of the last 5 years. Notwithstanding the no-volume rally in 4 of the last 5 days of the month, here’s how US Equities finished in April:

  1. SP500 -0.8%
  2. Nasdaq -1.5%
  3. Russell2000 -1.6%

From a S&P Sector performance perspective, the complexion of the SP500’s -0.8% loss is interesting:

  1. Top 3 Sectors = Utilities +1.8%, Consumer Discretionary +1.2%, Consumer Staples +0.3%
  2. Bottom 3 Sectors = Financials -2.3%, Industrials -1.1%, Tech -1.1%

With our only Global Equity asset allocations being US Utilities and Chinese Equities (up +1.8% and +5.9% for the month, respectively), we were quite pleased with being positioned for US Growth Slowing. The question now is what will please the monthly performance chasers for May?


Can the SP500 make higher-highs for the YTD if Financials and Tech continue to pull back? What happens to the Industrials if Growth Slowing continues? The Sector Studies tell me that the most bullish outcome for May could be Deflating The Inflation. That would be good for American Consumers (good for US Consumer and Healthcare longs).


Deflating The Inflation is already in motion, but you’ll only be able to take it out of market expectations if we stop waking up late every morning begging for Ben Bernanke to bail us out with another QE experiment.


Politicians hate the idea of Deflating The Inflation via a Strong Dollar because that would be bad (in the very short-term) for the stock market. Our Hedgeye Election Indicator has already picked this up (see Chart of The Day). President Obama just had his 1st bullish week in the last 5 (up +130bps week-over-week), primarily because the stock market was up +1.8% last week.


It’s perverse, but it’s real. That’s a big reason why neither Bush or Obama have been advised to back a Strong Dollar Policy.


Causality? Policies To Inflate cause “speculators” to bet on the inflation policies they expect from conflicted and compromised politicians at the Fed and Treasury. From an immediate-term correlation risk perspective, the writing is on the wall too:


Immediate-term TRADE correlations between the US Dollar and:

  1. SP500 = -0.83
  2. WTIC Oil = -0.86
  3. Equity Volatility = +0.93

In other words, as Colonel Jessep would have said, “You want the truth? you can’t handle the truth!” (YouTube video from A Few Good Men http://www.youtube.com/watch?v=5j2F4VcBmeo&noredirect=1). It’s the US Dollar, Stupid.


There should be no politics associated with the Purchasing Power of America’s Currency. Every American who championed the Strong Dollar Periods of 1983-1989 (US Dollar Index Averaged $115.18) and 1993-1999 (US Dollar Index Averaged $92.93), gets this.


At $78.69 this morning, the US Dollar Index is -32% and -15% below those 1980s and 1990s averages. The price of oil is +377% and +465% higher than those 1980s and 1990s Strong Dollar, Strong American GDP Growth Peiods of 4.3% and 3.8%, respectively.


We have a Crisis of Credibility in this country because no one wants to talk about the truth. Our currency is what we buy things with. It’s not something we can borrow respect with. Fighting for it is what should be getting you out of bed.


My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar Index, and the SP500 are now $1647-1667, $103.96-105.23, $78.69-79.22, and 1391-1408, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Back To Bed - Chart of the Day


Back To Bed - Virtual Portfolio


The Macau Metro Monitor, May 15, 2012




The number of new home sales in Singapore reached 2,487 in April, surpassing March's total of 2,393 units. 



As the first legal poker room in Singapore, ‘Poker World’ opened for business today and will be operating 24 hours, seven days a week for the foreseeable future.  The room has a capacity of seven tables with available stakes ranging anywhere from SGD $5/$10 to $500/$1000. 


TODAY’S S&P 500 SET-UP – May 15, 2012

As we look at today’s set up for the S&P 500, the range is 37 points or -0.70% downside to 1329 and 2.07% upside to 1366. 












  • ADVANCE/DECLINE LINE: on 5/14 NYSE -2114
    • Down from the prior day’s trading of -637
  • VOLUME: on 5/14 NYSE 802.79
    • Increase versus prior day’s trading of 2.17%
  • VIX:  as of 5/14 was at 21.87
    • Increase versus most recent day’s trading of 9.95%
    • Year-to-date decrease of -6.54%
  • SPX PUT/CALL RATIO: as of 05/14 closed at 2.50
    • Down from the day prior at 2.72 


TREASURIES – We shorted the long-bond (TLT) yesterday as our model signaled immediate-term TRADE overbought with the 10yr capitulating intraday at 1.77%. This morning’s bounce is to 1.79% and there’s no mean reversion resistance to 1.89%. Growth Slowing, globally, obviously gets priced in at the most painful pt of the pain trade (which was down). 

  • TED SPREAD: as of this morning 37
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.80
    • Increase from prior day’s trading at 1.76
  • YIELD CURVE: as of this morning 1.54
    • Up from prior day’s trading of 1.50

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am/8:55am: ICSC/Redbook weekly sales
  • 8:30am: CPI (M/m), Apr., est. 0.0% (prior 0.3%)
  • 8:30am: Empire Manuf., May, est. 9 (prior 6.56)
  • 8:30am: Advance Retail Sales, Apr., est. 0.1% (prior 0.8%)
  • 9am: TIC Flows, Mar. (prior $107.7b)
  • 9am: Long-term TIC Flows, Mar., est. $32.5b (prior $10.1b)
  • 9:30am: Fed’s Duke speaks on housing in Washington
  • 10am: Business Inventories, Mar., est. 0.4% (prior 0.6%)
  • 10am: NAHB Housing Market Index, May, est. 26 (prior 25)
  • 11am: Fed to sell $8b-$8.75b notes in 2/15/2014 to 5/31/2014 range
  • 11:30am: U.S. to sell $30b 4-week bills
  • 4:30pm: API inventories 


  • GOP presidential primary elections in Nebraska, Oregon
  • President Obama delivers remarks at National Peace Officers Memorial Service, U.S. Capitol, 11am
  • House, Senate in session:
    • Senate Finance holds hearing on effects of tax reform on tribes and territories, 10am
    • Trial of EPA lawsuit against Anadarko Petroleum seeking $25b to clean up as many as 2,772 polluted sites, begins in N.Y., 9am
    • NRC meets on developing guidance for U.S. nuclear power plants in wake of the Fukushima Dai-Ichi nuclear accident, 9am
    • IRS holds hearing on how and when some aspects of Foreign Account Tax Compliance Act will be implemented
    • Comment period ends on proposed USDA rules to boost beef exports, 5pm 


  • Euro-area GDP unchanged in 1Q from prior qtr; est. drop 0.2%
  • German first-quarter GDP grew five times more than forecast
  • Moody’s cut ratings on 26 Italian banks, kept outlook neg.
  • Facebook said to plan to raise IPO price range to $34- $38/shr
  • JPMorgan said to weigh bonus clawbacks after $2b loss
  • Coty withdraws $10.7b offer for Avon on “lack of engagement”
  • China foreign investment falls in sixth monthly drop
  • Groupon 1Q profit beat ests. as intl sales expanded
  • Hertz’s bid for Dollar Thrifty seen doubling in price
  • Eastman Kodak seeks interest in patents by today
  • U.S. retail sales probably slowed in April on weather, jobs
  • Amylin said to attract interest from Pfizer, AstraZeneca, Sanofi
  • Euro chiefs may offer leniency to ‘functioning’ Greek govt.
  • MSCI announces index changes, 5pm or later
  • Deadline for funds to disclose quarterly holdings in 13-F filings
  • Credit-card monthly charge-off data released by banks
  • JPMorgan, Morgan Stanley among cos. holding annual meetings 


    • Home Depot (HD) 6am, $0.65 -- Preview
    • Dick’s Sporting Goods (DKS) 7:30am, $0.38
    • Saks (SKS) 8am, $0.18
    • TJX (TJX) 8:34am, $0.54
    • Valspar (VAL) 8:40am, $0.82
    • Alacer Gold (ASR CN) 9:28am, $0.14
    • Carlyle Group (CG) Pre-mkt
    • Acxiom (ACXM), $0.20 Pre-mkt
    • Nationstar Mortgage Holdings (NSM) Pre-mkt
    • JC Penney Co (JCP) 4pm, ($0.08)
    • Sina (SINA) 4:30pm, ($0.22)
    • SEMAFO (SMF CN) 4:50pm, $0.10
    • Ralcorp Holdings (RAH) 5:44pm, $0.85
    • Boardwalk REIT (BEI-U CN) 5:46pm, C$0.61
    • Centerra Gold (CG CN) Post-mkt, $0.04
    • Tumi Holdings (TUMI) Post-mkt
    • Pan American Silver (PAA CN), $0.51 


  • Lead Shortages Loom on Record Demand for Batteries: Commodities
  • Naimi’s $100 Oil Target Challenged by Saudi Heat: Energy Markets
  • Oil Trades Near Five-Month Low on Forecast of U.S. Supply Gain
  • Copper Seen Gaining on Stronger-Than-Estimated German Expansion
  • Gold Seen Gaining as Plunge to Lowest This Year Spurs Investment
  • Coffee Nears a Three-Month High as Prices in Vietnam Advance
  • Soybeans Rebound From Six-Week Low as U.S., Brazil Exports Rise
  • Rubber Declines to Four-Month Low as Greek Impasse Saps Demand
  • Japan to Ration Power Coping With Reactor Shutdowns: Energy
  • Obama Asked by Environmentalists to Halt Shell’s Arctic Drilling
  • Cocoa Grindings in Brazil Advance to Record, Hartmann Says
  • Japan Seeks to Buy Most Milling Wheat in 4 Months in Tender
  • Biggest Ship Hedge Fund Turns Bullish on Supertankers: Freight
  • Palm Oil Gains on Speculation Demand to Climb Ahead of Ramadan
  • Sugar-Cane Area in India’s Biggest Producer to Drop This Year
  • Chesapeake’s Loan Exceeds Highest Bond Yield: Corporate Finance 









EUROPE – covered my Italy short yesterday and have covered both France and Spain shorts as well as we are getting immediate-term TRADE oversold signals in MIB, CAC, and IBEX of 13,629, 3049, and 6726, respectively. Levels and timing matter – Italy’s Stagflation this morning notwithstanding (GDP down -1.3% y/y w/ inflation +3.7%), manage the risk of the bearish range, proactively.






JAPAN – capitulation? Nikkei225 down another -0.8% overnight, leading losers in Asia (which stabilized overall on FDI in China slowing at a slower rate in April). The Nikkei is down 20 of the last 27 trading days (down -13.2%) and few in the manic media have even mentioned it. Keep your eyes on the island importer of oil and Keynesian economics.










The Hedgeye Macro Team

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 80.48%
  • SHORT SIGNALS 78.35%