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Looking Back

“The farther back you can look, the farther forward you are likely to see.”

-Winston Churchill


It continues to both fascinate and frustrate me that our said leaders in our governments haven’t learned a damn thing about the relationship between debt and growth.


While plenty of both Bush and Obama’s economic advisors dismissed the seminal conclusion in Reinhart & Rogoff’s This Time Is Different, that certainly doesn’t mean that history isn’t rhyming.


Allow me to write this one more time in block letters. Once a country has crossed the proverbial Rubicon (90% Debt/GDP), DEBT SLOWS GROWTH. There is no other growth “policy” left other than getting out of the way.


Back to the Global Macro Grind


Breaking “news” this morning is that someone in Europe has a new plan to pile more debt-upon-debt. Great. Meanwhile, the US (via the Washington, DC based and US tax payer backed IMF) is wholeheartedly cheering it on. Just great.


Atta boy Timmy – you would have nailed it if you just had a bigger bazooka, right?


Right. And bears use baby wipes in the bush. Markets get how ridiculous all of this is becoming. Markets are now starting to get worried that the US fiscal cliff is getting closer too. Markets don’t lie; politicians do.


US Fiscal Cliff?


Get the denominator in the Deficit/GDP ratio right, and you’ll get the timing of the US Fiscal Cliff right. That’s just math. If #GrowthSlowing continues, GDP will fall and the Deficit/GDP ratio will rise, faster.


Looking Back, when we made this call in Q1 of 2010 on Europe, we signaled this sovereign “credit risk” pop on the short-end of the curve. We called it the “Sovereign Debt Dichotomy” (Hedgeye Macro 2010 Quarterly Theme) because not all debt maturity problems and sovereign credit risks occur on the same duration.


So, if you want a real-time risk management signal for the US Fiscal Cliff, we have your back in the Chart of The Day. Watch 2-year Treasury bond yields which have recently popped back above my long-term TAIL risk line of 0.28%. That is one of the biggest Bernanke balls that is still being held under water. When/if it pops, he’ll blame Congress.


Blame Congress? Blame Europe? Blame Hedgeye?


Yep, blame everyone that you can other than yourself. That’s US Politics 1.0. And it’s dying on opacity’s vine.


Looking Back, at all of this - and I mean all of it - from when Krugman told the Japanese to “PRINT LOTS OF MONEY” in 1997 to when Bush II gripped and ripped the money printing and spending handles, to Obama following through on both - I think the fundamental conclusions won’t be the same as Japan’s or Europe’s, but as Mark Twain would say, they will rhyme.




Where am I seeing the Growth Slowing signals accelerate on the downside this morning?

  1. Spain issued 3-month pig paper at 2.36%! (versus 0.84% at their last auction)
  2. Italian CDS is pushing back up towards 600bps after printing a bomb of a Retail Sales report (-6.8% y/y)
  3. Cyprus is asking for a Spanish style (or is it Greek) bailout equivalent of ½ the country’s GDP
  4. Japan passes its tax hike bill in the Lower-House (doubling the consumption tax to cover deficit spending)
  5. Germany’s DAX snapped its last line of consequential support (our immediate-term TRADE line of 6251)
  6. Chinese stocks are in the midst of their longest losing streak in 6 months (down -9.3% since May 2nd)

Oh, but that’s everywhere else. The USA is going to “de-couple” this time. This Time Is Different!

  1. US stocks are down for 3 of the last 4 days (down -3.2% since our 100% Cash call)
  2. US stocks (SP500) have snapped their immediate-term TRADE line of 1318 support
  3. US Treasury Yields (10yr) remain in a Bearish Formation, with a wall of resistance between 1.69-1.93%

Maybe you can click your red shoes and believe that there is no place like investing at home until month/quarter-end (Friday). But you better not be long anything pro-cyclically American in the meantime:

  1. Energy stocks (XLE) lead losers, down -2.53% for June (down -10.3% YTD)
  2. Industrial stocks (XLI) are 2nd worst, down -1.63% for June (barely up at +1.03% YTD)
  3. Tech and Consumer (XLK and XLY) stocks both broke immediate-term TRADE support yesterday

When both leaders (Tech) and losers (Energy) are snapping, that’s bad.


Oh snap. Looking Back, it’s only the countries that don’t find it in themselves to change that end up like Japan or Argentina have for the last 20-30 years.


Do not stand idle. We have to stop these people before it’s too late. Stand up, and be the change in our society. Be patriots, and lead from the front. We are already there. We are Hedgeye. And we are not Looking Back.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $88.27-94.27, $81.96-82.66, $1.24-1.26, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Looking Back - Chart of the Day


Looking Back - Virtual Portfolio


TODAY’S S&P 500 SET-UP – June 26, 2012

As we look at today’s set up for the S&P 500, the range is 13 points or -0.66% downside to 1305 and 0.33% upside to 1318. 



SECTORS – most important risk management point in our S&P Sector Studies last night was mean reversion – leaders (Tech and Consumer) are now flagging the same risk signals as the losers (Energy and Industrials). It’s just one of the many signals that tell me earnings season will be as bad as the companies are already whispering (73 SP500 companies already guide down).










  • ADVANCE/DECLINE LINE: on 6/25 NYSE -1657
    • Down from the prior day’s trading of 1140
  • VOLUME: on 6/25 NYSE 753.75
    • Decrease versus prior day’s trading of -52.22%
  • VIX:  as of 6/25 was at 20.38
    • Increase versus most recent day’s trading of 12.53%
    • Year-to-date decrease of -12.91%
  • SPX PUT/CALL RATIO: as of 6/25 closed at 1.86
    • Up from the day prior at 1.65 


  • TED SPREAD: as of this morning 37
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.63
    • Increase from prior day’s trading at 1.60
  • YIELD CURVE: as of this morning 1.34
    • Up from prior day’s trading at 1.31 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am/8:55am: ICSC/Redbook retail sales
  • 9am: S&P/CS 20 City M/m, April, est. 0.3% (prior 0.1%)
  • 9am: S&P/CaseShiller Home Price Index, April, est. 134.85 (prior 134.1)
  • 10am: Consumer Confidence, June, est. 63 (prior 64.9)
  • 10am: Richmond Fed Manufacturing Index, June, est. 3 (prior 4)
  • 11am: Fed to purchase $4.5-$5.5b notes in 8/15/2020-5/15/2022 range
  • 11:30 am: Treasury to sell $25b 52-wk bills, 4-wk TBA
  • 1pm: Treasury to sell $35b 2-yr notes
  • 4:30pm: API inventories 


    • House, Senate in session
    • OECD releases survey of U.S. economy, 10am
    • Senate Banking Cmte hearing on how to empower and protect military servicemembers in the consumer finl mktplace, 10am
    • National Research Council holds conference on NASA’s strategic direction, with space agency officials, 8am


  • Rupert Murdoch is said to consider splitting News Corp. into two, one focusing on publishing, the other entertainment
  • Moody’s downgrades 28 Spanish banks on debt risk
  • Apple’s bid to limit Google’s use of certain patents as a tool to block imports of the iPhone and iPad may be getting traction at a U.S. trade agency
  • EU President Van Rompuy’s report on the future of the euro includes the option of a “phased” introduction of common debt
  • Facebook appointed COO Sheryl Sandberg to board, naming 1st female dir.
  • U.S. Congress said to consider delaying automatic federal spending cuts until March 2013
  • Russell announces final 2012 membership lists for indexes
  • Encana is investigating a news report of e-mails between it and Chesapeake Energy regarding land-lease bidding in Michigan
  • Vivendi to appeal $956m verdict in a lawsuit over its 2001 purchase from Liberty Media of its stake in USA Networks
  • Spain sells EU3.08b of bills vs maximum target EU3b; sells 6-month bills at 3.237% vs 1.737% in May
  • Italy sells zero 2014 bonds at 4.712% vs 4.037% on May 28
  • Europe’s financial crisis isn’t affecting the ability of speculative grade U.S. companies to meet debt obligations, keeping the default rate below the historical average: Moody’s
  • BP sold stakes in 2 North Sea fields to Mitsui for $280m in cash
  • Corn climbs to 7-mo. high
  • KKR raises $4b for investments in infrastructure, energy
  • Madoff customer pool is poised to swell to $7.3b by July
  • U.K. posts larger budget deficit than economists forecast in May
  • HSBC lowered its projection for China’s economic expansion this year to 8.4% from 8.6%


    • Robbins & Myers (RBN) 8:30am, $0.90
    • H&R Block (HRB) 4pm, $2.07  



COPPER – the Doctor has been signaling #GrowthSlowing since Feb/Mar; that has not changed here in June as Copper has tried to rally several times and failed each time at lower-highs, down another -0.4% this morning to 3.31; question is when does it have a $2 handle? Strong Dollar will deflate the commodity inflation. 

  • Cattle-Hide Economy Slumping as Goldman Sees Rally: Commodities
  • Oil Trades Little Changed as Storm Threat to U.S. Supply Fades
  • Corn Climbs to Seven-Month High as Dry Weather Parches U.S. Crop
  • Cocoa Rises on Speculation Ivory Coast Rains Will Cause Disease
  • Russia Increases Gold Reserves as Ukraine, Kazakhstan Add Metal
  • Gold Set to Decline on Concern Europe’s Crisis Will Boost Dollar
  • Copper Seen Rising for Second Day as China Demand May Strengthen
  • KKR Raises $4 Billion for Investments in Infrastructure, Energy
  • Gasoline Supplies Gain for Second Week in Survey: Energy Markets
  • Rice Crop in India at Record to Spur Exports for Second Year
  • ETFs Passive No More in Challenge to $7.8 Trillion Active Funds
  • Paris Rapeseed Set to Gain on Moving Average: Technical Analysis
  • Tropical Storm Debby Edges Eastward Toward Florida’s Gulf Coast
  • Mitsubishi’s $5.4 Billion Copper Bet Sparks Codelco Fight
  • Iron Ore Set for Monthly Advance as China Stimulus Boosts Demand
  • China’s First Wind-Farm Lull Limits Outlook for Sinovel: Energy 










ITALY – one of the foundations of Keynesian central planning is the belief that governments can “smooth the business cycle”; how’s that working out? Italian Retail Sales plummeting (-6.8% y/y) and Italy’s CDS rising back up to 590 this morning as Italian Bank funding issues come back to the table (Monti Pasche, 3rd largest Italian bank); MIB remains broken/crashing.














The Hedgeye Macro Team

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President Obama's Reelection Chances

President Obama’s chances of being reelected in November climbed 2% week over week amid improving performance in the stock market and Supreme Court rulings according to the Hedgeye Election Indicator (HEI). This is the second consecutive week of an uptick in reelection performance for President Obama, whose odds of reelection now stand at 56.3%.


Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, 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.  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 HEI 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.


President Obama’s reelection chances reached a peak of 62.3% on March 26, according to the HEI. Hedgeye will release the HEI every Tuesday at 7am ET until election day November 6.



President Obama's Reelection Chances - HEI June26

India FDI Inching Closer to Reality


It looks like India is inching closer to easing its policy on foreign direct investment (FDI) – a shift that would be positive for WMT and other global retailers. But, we’ve been down this road before.

It’s been nearly two-years since the Department of Industrial Policy and Promotion put forth a proposal regarding FDI in multi-brand retail in July 2010. Then last November, a proposal to allow up to 51% FDI in multi-brand retail was approved only to be subsequently shelved following political upheaval.

While the implications for India and global retailers alike remain largely unchanged from when we wrote on the issue last fall, two key factors at play increase the likelihood of government action: 1) the Presidential election takes place July 19th, and 2) an additional ~8% devaluation in the rupee since FDI reform was parked at year-end. While jockeying headed into the election could produce a multitude of outcomes, the reality is that the two are closely intertwined as the government is looking to encourage foreign flows to India in order to buoy the currency.

As for what this means for retail, here’s some context from our November note:

The Indian government has approved a policy to allow 51% FDI in multi-brand retail and 100% FDI in mono-brand retail in an effort to help buoy the currency. This effectively opens the door to one of Retail’s most attractive international markets to (aspiring) global retailers. (Hedgeye note: the policy for 100% FDI in mono-brand retail has been rolled out, it’s the multi-brand policy that was not)

Previously, multi-brand retailing was forbidden in India and the country restricted mono-branded retailers to 51% ownership requiring a local partner. The new shift in policy no longer blocks the likes of Wal-Mart, Carrefour, or Tesco from entering the market and enables mono-brand retailers to pursue more aggressive self-funded expansion plans (i.e. Nike, VFC, etc…).

As a point of reference, the Indian retail sector is currently worth approximately $450-$500Bn in USD, but has been growing at a HSD-LDD digit rate over the last few years One recent study called for the market to double by 2015.

Sounds like a lot, but keep in mind that India’s per capita GDP stands at US$1,410, while China currently sits at about $4,428. So perhaps not a stretch. No, India is not China, and vice/versa. There are distinct geographical, cultural and ideological differences that make them both distinct.

Also, keep in mind that with just ~6% of India’s retail distribution organized (i.e. not via stalls, etc.), it will take years for investment from global players – especially multi-brand retailers – to establish adequate supply chains to make  meaningful progress so we need to be mindful of near-term expectations.

But 10-years ago, no one cared about China. It was not every other word out of a CEO’s mouth because the core markets are too mature to grow. The companies that are successful there today are the ones who invested when no one cared.


While India accounts for roughly 1% of the global luxury market compared to China at closer to 10%, the opportunity for global retailers is clearly evident. Several companies like VFC, SHOO, and others have already established a foothold with local partners. For a company like VFC, which has clearly outlined its plan to grow sales in India from ~$50mm in 2010 to over $200mm by 2015 accounting for a mere 20bps of growth annually, this announcement could accelerate efforts in the region. Either way, we expect India to quickly become part of the expansion dialog among retailers – particularly in light of slowing growth across much of Europe and China.


Casey Flavin


India FDI Inching Closer to Reality - India GDP



NKE: Farewell, Olympic Trade

For 9 out of 10 of the past Olympic sessions, there has been the infamous “Nike trade.” Essentially, this involved NKE stock outperforming the S&P 500 by several percentage points in the run up to and during the Olympics. The streak continues into a six month span after the end of the Olympics as well.


But now, it appears that the trade has been discovered by the masses and the spread has eroded completely. NKE now UNDERPERFORMS the S&P 500 by 200 basis points (+3% versus +5%).  Throughout history, NKE outperformed the S&P 500 by an average of about 18% in 9 out of the 10 recent Olympic event years we mentioned. This is now a thing of a past.



NKE: Farewell, Olympic Trade - NKE Olympics

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