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Moral Markets

Takeaway: Yep, today it’s a race to the bottom. Who can implement the more left-leaning 2-stroke combo of Monetary and Fiscal Policy?

“Moral purpose characterized the march in an age of increasing amorality and political duplicity.”

-Victor Davis Hanson (The Soul of Battle)


Markets don’t have morals; people do. People and politicians plan; markets rise and fall. All the while our society changes. Contrary to many economically partisan beliefs, the stock market’s price doesn’t always reflect that either.


Some say that market prices reflect the health of a country. We say a country’s currency does. Some say that market volumes “don’t matter.” We say they reflect The People’s trust in the market’s price.


Newly minted Republican VP candidate Paul Ryan says fiscal and monetary policy have causal effects on jobs, growth, and inflation expectations. President Obama says Ryan is an ideologue. Both are probably right. If there ever was a pervasive economic ideology of both the Bush and Obama Administrations, Keynesian Economics swallows the cake.


Back to the Global Macro Grind


Everything that really matters in Macro Markets happens on the margin. We think that, on the margin, Paul Ryan is going to be US Dollar bullish over the intermediate-term TREND (3 months or more). He will, at a bare minimum, change the economic debate.


To contextualize that, across our core risk management durations (TRADE/TREND/TAIL), here’s how the US Dollar looks:

  1. TRADE = bearish (resistance = $83.06)
  2. TREND = bullish (support = $81.69)
  3. TAIL = bullish (support = $78.62) 

In other words, like it did in the early 1980s, our math thinks the intermediate (TREND) to long-term (TAIL) resuscitation of a decade of political Dollar Debauchery is coming to an end. With the inverse of what Dollar Down has meant to Global Consumers for the last 10 years now in play (Brent Oil prices up +337.5% since August 13th, 2002), that’s a very good thing.


Back to this whole ideologue vs. demagogue thing…


As a reminder, our ideological framework on what inflates/deflates currencies (i.e. the only risk management process that’s really worked across the last 99 years of economic history post the Federal Reserve Act of 1913) has 2 key components:

  1. Monetary Policy
  2. Fiscal Policy 

If short-termism (politics) is driving both of these policies the wrong way (printing money and deficit/debt spending as far as the eye can see in order to prop up stock market prices), you ultimately get a nasty employment, growth, and stagflation situation in store for your people. Sound familiar?



  1. Britain 1960s
  2. USA 1970s
  3. Europe/USA today

Yep, today it’s a race to the bottom. Who can implement the more left-leaning 2-stroke combo of Monetary and Fiscal Policy?


Thankfully, I’m not a Bush Republican or an Obama Democrat so I don’t have to shape my storytelling to a partisan conclusion. Economically speaking, I’m center-right. I don’t lever my family or firm up with debt. I’d rather die than beg for a bailout.


Both Bush and Obama were center-left. Krugman vs Bernanke is hard left versus center-left (Bush and Obama had Geithner and Bernanke).


Ideologically speaking:

  1. Keynesian Economics = center-left
  2. Hayekian Economics = center-right

Paul Ryan is a professional politician, but not unlike many successful politicians who have come before him he has effectively borrowed what Margaret Thatcher did in the late 1970s, slamming it down at the Tory Convention, saying “this is what we believe!”


Hayekian Economics.


What do you believe? It’s hard for me to believe that more than 1 out of 100,000 Americans can explain the difference between Keynesian and Hayekian Economics, never mind which one they believe. That will change. Unless this time is different, of course.


Do you believe piling more debt-upon-debt, taxing, and spending, is going to give you the elixir of promised economic growth? Do you believe that easy monetary and fiscal policy debauches your currency and gives you inflation in food/energy, perpetuating a slow growth, no jobs, economy?


Do you believe in partisan fairy tales? Moral Markets don’t. Because they aren’t moral. This election is now going to be all about something that’s at least a little closer to what’s been driving us all apart.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Russell2000, and the SP500 are now $1611-1628, $110.89-115.35, $81.79-83.03, $1.21-1.23, 790-803, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Moral Markets - 1111. el


Moral Markets - Virtual Portfolio

We The People: Why Paul Ryan Matters

Takeaway: Romney's choice of Paul Ryan as a running mate could be the key to winning the election. Ryan's proposal is just what the market ordered.

It was announced on August 11, 2012 that Republican Presidential candidate Mitt Romney had chosen Congressman Paul Ryan (R-WI) as his running mate for the 2012 election against Barack Obama.


Up until now, Romney’s choice for a vice president had been closely guarded with many names being thrown in the hat over the past few months. The choice of Ryan is both important and symbolic. Ryan is young, fierce and a tough fiscal conservative. Only 42-years-old, Ryan has been in office since 1998, beginning his political career at the young age of 28. The Chairman of the House Budget Committee, he is perhaps best known for “The Path To Prosperity: A Blueprint for America’s Renewal” (TPFP) which is an alternative 2012 budget proposal seen as a response to President Obama’s 2013 budget proposal.


The Republican consensus (according to several polls) is that Ryan is the best choice Romney could have made for the VP nominee. In a year where debate surrounding the nation’s struggle with debt and budget deficit has taken center stage, Ryan’s proposal aims to solve these issues through drastic measures of spending cuts and austerity programs. While “The Path For Prosperity” was approved in the Republican-controlled House, Democrats killed it in the Senate when it came to a vote in May.


There is no argument that Ryan will invigorate the Romney campaign and act as an integral part of developing his policies once in office. How Ryan will accomplish this, however, remains to be seen. Balancing complex mathematics and economics, there are essentially four main issues at hand in order to make Ryan’s budget work. They are:


  • A total revamp of the Medicaid/Medicare programs, replacing it with a coupon/voucher system
  • Do away with the Patient Protection and Affordable Care Act (aka Obamacare)
  • Fix America’s tax laws to plug loopholes and deduction issues
  • Reduce overall government spending on different fronts

Earlier this year, Hedgeye Healthcare Sector Head Tom Tobin weighed in with his outcome of what would happen should Romney set about implementing Ryan's policies:


Our primary conclusion is that if indeed Romney wins the presidency, and by association and praise, Paul Ryan’s policy recommendations are then implemented, that this will come to be seen as a great deal for the Healthcare Industry.   As it relates to Medicare, the primary source of savings, Paul Ryan’s plan doesn’t  begin until 2024, a full 12 years and several election cycles away.  Additionally, Medicare still grows under this assumption, just at a lesser rate.”


We The People: Why Paul Ryan Matters  - RYAN impact medicare


Hedgeye Director of Research Daryl Jones summarizes the other parts encompassing the Ryan budget quite nicely:


• Healthcare – The Ryan budget would convert the current Medicare system to a system of premium support payments and would increase the age of eligibility of Medicare.  On Medicaid, the federal share of Medicaid would be converted to block grants to the states, which would grow with population and CPI-U.  The Ryan budget would repeal all components of the 2010 Patient Protection and Affordable Care Act (more commonly known as Obamacare). Finally, several limitations of punitive damages in medical malpractice would be implemented;


• Other spending – Under the Ryan budget, mandatory and discretionary spending, other than that for mandatory healthcare (outlined above) and social security, are cut from 12% of GDP in 2010 to 6% of GDP in 2022 (this is below pre-WW2 levels); and


• Revenue – Under the Ryan budget, federal government revenues grow from 15% of GDP in 2010 to 19% of GDP in 2028, and remain at that level thereafter.  For comparative purposes the long run average of federal government revenue as a percentage of GDP from 1960 – 2011 is 17.6%.   So, in essence tax receipts in Ryan’s proposed budget are slightly above the long run percentage of taxes as share of the U.S. economy and ~27% above current levels.


At our current rate, America is on an unsustainable path of spending. Ryan’s budget is a scary proposition for most but it may be the only viable option on the table right now. Counting on a split Congress and the President to get their act together and pass something is like counting on Oscar The Grouch to be polite and cordial. Should we succeed, it could act as the ultimate bullish catalyst for both the markets and the economy; hard to complain about that.


Mass win per table per day popped to an all-time high in July despite the additional SCC tables

  • Following a disappointing opening of SCC in April, win per table is moving in the right direction
  • Mass continues to set all-time highs for table productivity which bodes well for LVS margins
  • Amid the hysteria, VIP productivity is only down to September levels but should start climbing again in September with the opening of the Sheraton rooms



Germans On Deck

-- For specific questions on anything Europe, please contact me at to set up a call.


No Current Positions in Europe


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +1.6% week-over-week vs +0.6% last week. Top performers: Portugal +4.5%; Spain +4.3%; Greece +3.4%; Poland +3.2%; Finland +3.1%; Czech Republic +3.0%; Italy +3.0%. Bottom performers: Romania -1.5%; Cyprus -1.2%; Russia (RTSI) -0.4%; Sweden -0.1%. [Other: France +1.8%; Germany +1.1%; UK +1.0%].
  • FX:  The EUR/USD is down -0.73% week-over-week vs +1.04% last week [-5.14% YTD].  W/W Divergences: NOK/EUR +1.81%; SEK/EUR +1.40%; RUB/EUR +1.21%; TRY/EUR +0.41%; HUF/EUR +0.09%; CHF/EUR +0.07%; DKK/EUR -0.01%; PLN/EUR -0.23%.
  • Sovereign CDS:  Sovereign CDS followed yields, down across the periphery this week. On a week-over-week basis Portugal declined the most, down -85bps to 767bps, followed by Spain -49bps to 513bps, Italy -45bps to 450bps, and Ireland -36bps to 462bps.
  • Fixed Income:  The 10YR yield for sovereigns across the region were mostly down this week. Greece saw the largest decrease week-over-week by -129bps to 24.35%, followed by Portugal at -95bps to 9.99%. Italy and Spain fell -21bps and -12bps to 5.88% and 6.87%, respectively. Germany gained +5bps on the week to close at 1.38%. 

Germans On Deck - ddd. yields


Germans On Deck - ddd. cds   a


Germans On Deck - ddd. cds   b



Germans On Deck


For a positive week of equity performance from Europe (the STOXX Europe 600 was up +1.6%) there was little material evidence of shifting policy or further clues towards programs to limit the region’s sovereign and banking risks.  Interestingly, the market sold off last Thursday as Draghi did not deliver on his “whatever” promise, however seemingly the market was bullish this week on his same comments from the conference call (8/2) in which he said that the ECB “may undertake” non-standard measures, hinting at a reactivation of the SMP to buy bonds on the secondary market and a re-engagement of the EFSF to buy bonds on the primary market. There was still no hint that the SMP has been re-activated. We’ll look to data to be released on Monday for last week’s buying to see if the trend of 21 straight weeks of zero buying from the ECB has been bucked.


We’re also a bit surprised by the market’s move because as it relates to the political risk unfolding (and don’t forget many Eurocrats are on vacation this month), we’d expect more of an impasse as we wait for 12 September and Germany’s Constitutional Court ruling on the constitutionality of the ESM and Fiscal Compact. Interestingly, on Monday the German court was pressed to also rule on the constitutionality of a banking license of the ESM.  Arguably this adds another hitch in the German court signing off on the ESM. If it is not passed Eurocrats are back to square one, which leaves the region further in stitch as the EFSF funding ticks down (and is massively undercapitalized to deal with potential sovereign and banking bailout needs/risks on the horizon). On Thursday an important hurdle was cleared in France’s Constitutional Council ruling that the EU Fiscal Compact did not require changes to the constitution. 


Please note that as of now, even if the German Court passes, there is no specific language governing the scope of the ESM, namely if it has a banking license, as the only clarity on the program is three vague paragraphs issued at the June 28-9 EU Summit meeting. Said shortly, there’s a lot of political runway left in tying up some of the programs expect to suspend economic reality and provide financial assistance to the periphery.


Given this environment, we’ll work to keep you abreast of the most important calendar catalysts that we think large expectations will be built into.


Calendar Catalysts:


12 September - Germany’s Constitutional Court rules on the constitutionality of the ESM and Fiscal Compact.


12 September - Dutch General Election


Late September - According to La Tribune, Moody's will evaluate the consequences of the Eurozone crisis on France's AAA rating by the end of Q3. We think a downgrade to AA is a real probability.


October - Final discussions expected between Troika and Eurozone finance ministers to determine if Greece is eligible for €31B in new aid, including €25B to recapitalize the banking sector.


Mid October - There’s a possibility of a German Sovereign credit rating downgrade, especially should France be reduced by a notch beforehand.


29 & 31 October - Spain’s debt maturity schedule scares as the Treasury is bumping up against sovereign debt maturities of €20.27 of debt maturing on two days.



Call Outs:


Greece - S&P cuts outlook from Stable to Negative. Sees Greece likely to need additional EU/IMF funding in 2012.


UK - The Bank of England slashed its outlook for British economic growth to 0% for this year, as Eurozone "storm clouds" cast a long shadow and scars from the world's financial crisis appear deeper than previously thought.

  • On Stimulus:  Governor Mervyn King said there was no urgent need to print more money
  • On Rate Cut:  King said there’s even less of a case to cut interest rates  
  • CPI Forecasts:  at ~1.7% in 2 years time, ~1.8% in 3 years time
  • GDP Forecasts:  slashes 2012 growth forecasts to 0% and +1.9% in 2013 (vs May forecast of ~+0.8% and ~+2%, respectively). King warned that the economy would grow at sub-par speed for at least the next three years




We remain highly sensitive around our trading ranges of $1.20 to $1.23. We reiterate that below $1.20 we see no material levels of support.


Germans On Deck - ddd. eur



Data Dump:


---We saw another week of weak data from Europe. In the charts below we highlight bombed out industrial production figures, and note that even the perceived economic stalwart of Germany has slid substantially as shown in the German Factory Orders chart.


Germans On Deck - ddd. industrial prod


Eurozone Sentix Investor Confidence -30.3 AUG vs -29.6% JUL


Germany Factory Orders -7.8% JUN Y/Y (exp. -7.0%) vs -5.3% MAY   [-1.7% JUN M/M (exp. -0.8%) vs 0.7% MAY]


Germans On Deck - ddd. factory orders


Germany Exports -1.5% JUN M/M (exp. -1.3%) vs 4.2% MAY

Germany Imports -3.0% JUN M/M (exp. -2.0%) vs 6.2% MAY

Germany Industrial Production -0.3% JUN Y/Y vs -0.3% MAY

Germany CPI FINAL 1.9% JUL Y/Y (vs prev estimate of 2.0%)


France Industrial Production -2.3% JUN Y/Y (exp. -1.8%) vs -3.7% MAY

France Manufacturing Production -2.6% JUN Y/Y (exp. -2.1%) vs -4.6% MAY

Bank of France Business Sentiment 90 JUL vs 91 JUN


UK Halifax House Price -0.6% JUL Y/Y (inline) vs -0.5% JUN   [-0.6% JUL M/M (exp. -0.5%) vs 0.8%]

UK New Car Registrations 9.3% JUL Y/Y vs 3.5% JUN

UK Industrial Production -4.3% JUN Y/Y (exp. -5.3%) vs -1.8% MAY

UK Manufacturing Production -4.3% JUN Y/Y (exp. -5.7) vs -1.8% MAY

UK PPI Input 1.3% JUL M/M (exp. 1.3%) vs -2.9% JUN   [-2.4% JUL Y/Y (exp. -1.5%) vs -3.0% JUN]

UK PPI Output 0.0% JUL M/M (exp. 0.0%) vs -0.6% JUN   [1.7% JUL Y/Y (exp. 2.0%) vs 2.0% JUN]


Italy Q2 GDP Preliminary -0.7% Q/Q (exp. -0.8%) vs -0.8% in Q1   [-2.5% Y/Y (exp. -2.5%) vs -1.4% in Q1]

Italy Industrial Production -8.2% JUN Y/Y vs -6.6% MAY

Italy CPI FINAL 3.6% JUL Y/Y (prev. est. 3.7%)


Spain Industrial Output NSA -6.9% JUN Y/Y vs -5.7% MAY

Spain Housing Transactions -11.4% JUN Y/Y vs -11.6% MAY

Portugal Industrial Sales -3.2% JUN Y/Y vs -1.1% MAY

Portugal CPI 2.8% JUL Y/Y vs 2.7% JUN

Portugal Construction Works Index 55.4 JUN vs 59.3 MAY


Switzerland Unemployment Rate 2.9% JUL vs 2.9% JUN

Switzerland CPI -0.8% JUL Y/Y vs -1.2% JUN


Netherlands Industrial Production -2.4% JUN Y/Y vs 0.0% MAY

Netherlands CPI 2.6% JUL Y/Y vs 2.5% JUN

Austria Wholesale Price Index 1.2% JUL Y/Y vs 0.2% JUN


Norway Industrial Production 7.7% JUN Y/Y vs 13% MAY

Norway CPI including oil -0.6% JUL Y/Y vs -0.2% JUN

Finland Industrial Production -1.0% JUN Y/Y vs -1.4% MAY

Denmark CPI 2.1% JUL Y/Y vs 2.2% JUN


Ireland CPI 2.0% JUL Y/Y vs 1.9% JUN

Ireland Consumer Confidence 67.7 JUL vs 62.3 JUN

Ireland Industrial Production 9.2% JUN Y/Y vs 4.6% MAY


Greece CPI 1.3% JUL Y/Y vs 1.3% JUN

Greece Unemployment Rate 23.1% MAY vs 22.5% APR


Czech Republic Unemployment Rate 8.3% JUL vs 8.1% JUN

Czech Republic CPI 3.1% JUL Y/Y vs 3.5% JUN

Hungary Industrial Production 0.6% JUN Y/Y vs 2.4% MAY

Bulgaria Industrial Production 1.5% JUN Y/Y vs 0.4% MAY

Latvia Q2 GDP Preliminary 1.0% Q/Q vs 1.0% in Q1   [5.1% Y/Y vs 6.8% in Q1]


Turkey Industrial Production NSA 2.7% JUN Y/Y vs 5.9% MAY



Interest Rate Decisions:


(8/9) Serbia Repo Rate HIKED 25bps to 10.50%



The Week Ahead:


Monday Jul. Germany Wholesale Price Index; UK Jul. RICS House Price Balance; Italy Jun. General Government Debt; 2Q Greece GDP - Advance


Tuesday – Aug. Eurozone ZEW Survey Economic Sentiment; Jun. Eurozone Industrial Production; 2Q Eurozone GDP – Advance; Aug. Germany ZEW Survey Current Situation and Economic Sentiment; 2Q Germany GDP – Preliminary; Jul. UK CPI, RPI; Jun. UK ONS House Price; Jul. France Consumer Price Index; 2Q France Gross Domestic Product – Preliminary, Non-Farm Payrolls, Wages; Jul. Spain Consumer Price Index - Final


Wednesday – UK BoE Minutes; Jul. UK Claimant Count Rate, Jobless Claims Change; Jun. UK Average Weekly Earnings, ILO Unemployment Rate,

Employment Change


Thursday – Jul. Eurozone CPI; Jul. UK Retail Sales; Jun. Spain Trade Balance


Friday – Jun. Eurozone Current Account, Trade Balance; Jul. Germany Producer Prices


Matthew Hedrick

Senior Analyst

Industrial Indicator: Mining Equipment - Chinese Real Rebar Prices Break 2009 Lows

Real Chinese Rebar Prices Below 2009 Lows

  • Weak Construction: Falling Chinese rebar prices are a reasonably real-time indication that construction activity in China may be slowing.
  • Negative for Mining Investment: Mining investment has been very robust (we’ve called it a bubble).  Chinese demand for materials has been central to global mining investment. 
  • Mining Equipment:  If fixed asset investment slows, equipment producers like CAT could see demand for resources-related equipment evaporate.
  • Exposure to Developed Market Construction Rebound:  It is difficult to find capital equipment exposure to cyclically depressed developed market construction activity without getting exposure to slowing developing market construction markets.  We think that the Commercial Truck OEMs provide an effective and less risky way to increase portfolio exposure to developed market construction.  We are presenting our Black Book on Commercial Trucking August 16th at 11AM.

Industrial Indicator: Mining Equipment - Chinese Real Rebar Prices Break 2009 Lows - real steal rebar2



UPCOMING EVENT:  On August 16th at 11:00AM we will be hosting a call on the launch of our Trucking OEM Black Book that will discuss Navistar, PACCAR, Cummins and other key names in the space.


 Industrial Indicator: Mining Equipment - Chinese Real Rebar Prices Break 2009 Lows - perf 81012

Idea Alert: JCP - Street Cred Dead

Keith shorted JCP again today on the short squeeze around what what was a quarter that can be characterized as none other than Horrendous.

We won't bother with the full financial review. Comps down -22%, dot.com down 33% and a ($0.67) loss pretty much sims that up.

But that's the past. We invest for the future. One thing that matters in investing for the future is believing in who is running the ship. We initially figured that Johnson's Apple halo would have lasted 18-24 months. But about 5-minutes into his commentary today, his credibility stood up, ran out the door, and got hit by a bus.

Last quarter, his level of arrogance around communicating the message was bothersome. He spoke to the Street like we were toddlers, or at least retail novices. He glossed over the bad, and played up whatever positive statistic he could find. A JV mistake for a new CEO.

We #timestamped our view in the Twittersphere this morning that the key thing we were looking for today from RJ was humility, and a realistic view as to how he portrayed what challenges lie ahead.

In the first 2 minutes, he started off great by highlighting 2 mistakes he's made. Pricing and marketing. But then he fowled it up by saying -- in a very firm tone -- "In January we laid out a four-year plan to transform the company. We said this will be a really tough year. I don't think that message got through. Your expectation is much higher than ours."

Really Ron? You sent through a pretty definitive message when you said the following...

Feb 24th Q4 earnings call: "We will meet or exceed $1.59 in EPS in 2012. Our GAAP earnings guidance is unchanged from the analyst meeting ($1.59 GAAP; $2.16 non-GAAP)"


May 15th Q1 earnings call: "We want to make the right business decision, and therefore we're going to remove our GAAP guidance, but stand by our non-GAAP guidance ($2.16 a share), which really is the earnings power of the company going forward." But the catch is that they did not let us know what the restructuring charges were. So there was no way we could really tell if they were on track.

Aug 10 Q2 earnings call: "We've made the decision to pull our guidance."

Also, can you explain why you sold your stock just before that last earnings release? You have better information than everybody else, and you bailed. Someone was on the other end of that trade. Ever think of that?

This is an execution story. Execution requires trust. Trust needs to be earned, not gifted. This team has zero. And what's sad is that it was all very avoidable. Simply be up-front and honest with your shareholders, and you generally will be ok. But a bad reputation will take a long time to recover from.


Idea Alert: JCP - Street Cred Dead - JCP YoutTube


Idea Alert: JCP - Street Cred Dead - jcp ttt





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