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Debt Ceiling: Déjà Vu All Over Again?

Takeaway: Based on our math, the debt ceiling may be technically breached by late November, which may introduce a new and critical factor ahead of the November elections.


In the world of manic markets, the 2011 debt ceiling crisis seems like a lifetime ago.  In reality, the deal to extend the debt ceiling in 2011 was reached on August 2nd, just under a year ago.   In fact, President Obama signed the Budget Control Act of 2011 into law on August 2nd.   This was the date that the Department of Treasury estimated that the borrowing authority of the U.S. federal government would be exhausted.

 

In true lagging indicator fashion, Standard and Poor’s downgraded the credit rating of the U.S. government a few days later. As outlined in the chart below, the U.S. equity markets, not surprisingly, were very volatile into and out of this.  In fact, the volatility was comparable to the 2008 financial crisis with the Dow dropping north of 5.5% on August 5th alone. 

 

Debt Ceiling: Déjà Vu All Over Again? - chart1

 

Ironically, the debt ceiling had been successfully raised 70+ times from 1960 heading into the summer of 2011.  The advent of the Tea Party elevated the debate on federal government debt and spending and turned a routine Congressional legislative activity into a major political football.  The Tea Party pushed their Republican colleagues to reject any proposal that did not also incorporate immediate and sizeable spending cuts.

 

As noted above, the ultimate compromised proposal was the Budget Control Act of 2011 which had the following key provisions:

 

Debt Limit 

  • Debt was increased by $400 billion immediately;
  • The President could request a further increase of $500 billion, which Congress could veto with a 2/3rds majority; and
  • The President could request a final request of $1.2 -> $1.5 trillion, subject to the same super majority.

Deficit Reduction

  • The bill outlined $917 billion of cuts over 10 years in exchange for the initial increase;
  • The bill established the Joint Select Competitive Committee on Deficit Reduction to agree to cut at least an additional 1.5 trillion over the next 10 years; and
  • If the Joint Committee did not come to an agreement on a bill of at least $1.3 trillion in cuts, then Congress could grant a $1.2 billion increase in the debt ceiling but this would trigger across the board $1.2 trillion in cuts equally split between security and non-security spending.

The widely discussed “Fiscal Cliff” in 2013 is a function of both a potential roll back of the broad Bush tax cuts and the automatic spending cuts outlined in the provisions of the Budget Control Act.  In our Q3 2012 themes call tomorrow, we will go into a discussion of the “Fiscal Cliff”.  In addition to this fiscal cliff and potentially even more pressing, is the issue of once again bumping into the debt ceiling.

 

In the table below, our Healthcare team outlines three different scenarios when the U.S. may hit the debt ceiling.  In the analysis, we show an aggressive scenario, base case scenario, and a conservative scenario.  In the most aggressive scenario, the debt limit is breached on November 28th, 2012.  In the most conservative scenario, the debt limit is breached on January 14th, 2013.  In the aggressive scenario, the debt limit becomes a key issue in the 2012 election.  On the other hand, if the debt limit is pushed into January, it becomes an issue just as the fiscal cliff becomes reality.  

 

Debt Ceiling: Déjà Vu All Over Again? - chart2

 

As our Healthcare team emphasized in a recent note, the post election period looks potentially very frightening as both the Fiscal Cliff and Debt Ceiling back up on each other within weeks.  The post election period between November 6th, and the deadline for the “Fiscal Cliff” on January 1, 2013 may be more uncertain than last summer when volatility skyrocketed.

 

The wild card as it relates to some resolution of either the Fiscal Cliff or the Debt Ceiling may well be the increasing likelihood that U.S. Employment and GDP will still be growing at a vulnerable pace.  In effect, it seems highly unlikely that a standoff over the Fiscal Cliff or the Debt Ceiling will materialize in the very short term as either or both items will likely induce a recession.  That, of course, assumes that our politicians will act rationally, which is of course is not very likely in an election year.

 

 

Daryl G. Jones

Director of Research

 

 

 

 



Rethinking Capital

Here’s the deal: Barclays has a mess on its hands that is not going to go away anytime soon no matter how many executives resign. In fact, the LIE-BOR situation has been exacerbated if anything and has spread to Germany where Deutsche Bank is now under investigation. What’s going on is that regulators and market participants are beginning to take a good hard look at banks and their tangible common equity relative to total assets.

 

 

Rethinking Capital - BANKS capital

 

 

Glass-Steagall is long gone. It shouldn’t have been destroyed in the first place. What is happening is a paradigm shift in which the public will demand that Barclays break up its traditional banking unit from its investment banking unit (Barclays Capital).

 

This trend will continue all over Europe and eventually, may reach the U.S. But think about this for a minute: Barclays currently has a market capitalization of about $20 billion. It has around $2.1 trillion in gross net exposure to derivatives. In other words, the bank is well undercapitalized. We think that should a spinoff occur, Barclays Capital alone would need $20 billion in addition capital, which will be difficult to raise.


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Q3 MACRO THEMES AND PRESENTATION CALL TOMORROW, JULY 11th, 2012, 11AM EST

Valued Client,

  

5-10 minutes prior to the 11AM EST start time please dial:

 

(Toll Free) or (Direct)

Conference Code: 142354#

  

Materials: * PLEASE NOTE MATERIALS WILL BE SENT OUT TOMORROW MORNING PRIOR TO THE START OF THE CALL. 

                  

To submit questions for the live Q&A, please email

 

******************************************************************************  

  

"Q3 MACRO THEMES AND PRESENTATION"

 

This Wednesday, July 11th at 11am EST, the Hedgeye Macro Team, led by CEO, Keith McCullough, and DOR, Daryl Jones, will be hosting our 3Q12 Macro Themes Call.    

  

Topics will include:  

  • Growth Slowing's Slope - Our fundamental view is that growth will come in lower than expectations across a collection of major economies - including the U.S. We refute the notion of the U.S. decoupling and will present the main indicators that signal a higher probability of equities crashing from here. 
  • The Cliff - We analyze the assumptions embedded in consensus/CBO forecasts regarding the "fiscal cliff" and offer our view on how heightening uncertainty regarding this event should impact global financial markets. Further, we discuss the question: will slower domestic growth pull forward the debt ceiling debate and introduce uncertainty on a fiscal cliff resolution? 
  • Obama vs Romney - As elections approach we evaluate the policy impact on the broader economy based on the victor. Could the U.S. look more like Europe if Obama wins? And what asset classes stand to outperform based on the next president?  

ABOUT HEDGEYE

Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service.

 

Please contact if you have any questions.

  

Regards, 

 

The Hedgeye Sales Team

 

 

 


BWLD: WINGSTOP COMP POINTS TO UPSIDE SURPRISE

Wingstop comps are pointing to an upside surprise for Buffalo Wild Wings’ 2Q12 same-restaurant sales.

 

Buffalo Wild Wings has been a name we have liked on the short side for some time. Our call to stay short into the most recent earnings report, on April 24th, was correct as comps came in below expectations and the stock traded lower on the news.  We were wrong on 4Q11 earnings, however, and don't want to make the same mistake twice.  Heading into 2Q12 earnings on 7/20, we would advise not to be short heading into the quarter.  Keith has traded this name very well in the Hedgeye Virtual Portfolio, covering for a gain yesterday, but we will not be advising him to revisit on the short side until this earnings report is out of the way.

 

Wingstop, a concept similar to Buffalo Wild Wings with 600 units in 31 states, posted strong same-restaurant sales of +12.6% for the second quarter.  This is important because of the strong correlation between the two year averages of these concepts’ same-restaurant sales.  If the relationship holds or – merely – doesn’t reverse, BWLD could print comps as high as 12% for the second quarter when it reports on 7/20.  This would obviously negate our short thesis on the stock, which is predicated on cost pressures lowering EPS expectations and/or guidance over the remainder of 2012.  With short interest at 12.4% of the float and the heightened likelihood of a substantial upside surprise in same-restaurant sales, we think a squeeze between now and when earnings is released has become a distinct possibility.

 

BWLD: WINGSTOP COMP POINTS TO UPSIDE SURPRISE - wingstop bwld

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


HedgeyeRetail Visual: Discretionary Accelerating

Consumption slowed in May, and yet discretionary categories accelerated on the margin. Energy is beginning to help, which people will probably point to as the root cause. But keep in mind that we just saw the biggest sequential jump in credit card debt in 5-yrs. 

 

HedgeyeRetail Visual: Discretionary Accelerating - essential vs disc

 

HedgeyeRetail Visual: Discretionary Accelerating - consumption vs income

 

HedgeyeRetail Visual: Discretionary Accelerating - CIS


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