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Takeaway: Some countries have more room to stimulate than others.

CONCLUSION: While certainly not a credible bull case in and of itself, we do think it’s important to contextualize which countries have the appropriate space to stimulate economic growth over the intermediate term – especially in light of the concerns we continue to have with respect to the outlook for global economic growth.


If you are also using this latest no-volume melt-up to sell/short into, then you’re likely on the same side of the coin as us with respect to global growth – specifically that it is likely to continue slowing over the intermediate term in the face of potential negative catalysts such as the Fiscal Cliff/Debt Ceiling Drama in the US, a resurgence of European sovereign debt risks and/or an incremental round of tightening in the Chinese property market.


If we are indeed in a 2007-esque perch atop lower-highs across many equity markets globally, then perhaps consensus is right: the bull case is, in fact, bailouts. Much like valuation for single stocks, we do not anchor on stimulus as the deciding factor for any thesis on a country’s equity market. Rather, we try to identify opportunities where expansionary POLICY can lead improvements in a particular economy’s GROWTH outlook without materially compromising the INFLATION outlook. Reflexivity remains core to our fundamental research process.


In that light of this process and our negative intermediate-term fundamental outlook for global economic growth, we decided to score countries based on a few key metrics to determine which  of them had the most/least space to stimulate going forward. It’s important to note that this score does not replace our policy expectations for each county in the sample, as those individualized conclusions continue to be driven by our forward-looking G/I/P framework and real-time market signals. Nor is it an attempt to predict who’s going to announce incremental stimulus efforts over the intermediate term. Rather, this is our best first attempt at determining which countries have room to stimulate the most/least  without imposing incremental risk upon their currency and bond markets.



For the 17 countries in Asia and Latin America we were able to find comparable data sets for, we gathered 10yrs of sovereign budget balance and debt metrics (as percentages of GDP; annual) as well as TTM YoY CPI readings. Secondly, we statistically analyzed each data set to determine where the latest data point was relative to its mean from a standard deviation perspective. Lastly, we tallied each of the three metrics together for each country, inverting the debt/GDP and CPI readings (i.e. higher values here should be interpreted negatively).



As the table and chart below show, there’s a sizeable discrepancy between those countries with the most space and the least space in our sample. The median score of 0.58 points pales in comparison to the 6.89-point delta between the country with the most room to stimulate (Peru) and the country with the least space (Mexico). While certainly not to be used as a one-factor investment thesis, we are pleased to see two countries we’ve been most positive on in recent quarters (Philippines, Thailand) on the right side of the latter chart and outperforming in the YTD, while two countries we’ve been most negative on recently (Australia, Japan) on the left side of that same chart and underperforming on that same duration.






Moreover, the country-level micro data points support our findings as well: Filipino policymakers are planning an incremental $16 billion worth of investments on roads, schools and airports and ruling Thai policymakers are looking to continue spending upwards of 11% of their federal budget on their 1yr-old rice price-fixing scheme, designed to inflate the incomes of the country’s farmers. Conversely, Australian policymakers are currently implementing the largest fiscal tightening since at least 1953, while Japanese policymakers have recently passed a contentious VAT hike bill – the first of its kind since 1997.


All told, while certainly not a credible bull case in and of itself, we do think it’s important to contextualize which countries have the appropriate space to stimulate economic growth over the intermediate term – especially in light of the concerns we continue to have with respect to the outlook for global economic growth.


Darius Dale

Senior Analyst


Takeaway: QE3 implications: Fed asset purchases are highly correlated with jobless claims, and jobless claims are highly correlated with the market.

How Does the Fed Measure Up as a Job Creator?

According to the Federal Reserve's website, one of its statutory objectives established by Congress is "maximum employment". The other two are stable prices and moderate long-term interest rates.  


The chart below suggests a strong relationship exists between Federal Reserve securities holdings (QE) and employment. On the x-axis we're plotting Fed holdings of treasury, agency and agency MBS securities while on the y-axis we're showing rolling initial jobless claims. This is weekly data going back 42 months, which corresponds to the beginning of QE1. The R-squared is relatively high at 0.928, suggesting that if there's a causal relationship, then changes in the level of Fed holdings of government and quasi-government debt explain about 93% of the change in the level of jobless claims.


This means that it's possible to ask the question, assuming a causal relationship, how much does it cost the Fed to create a job? An important note here is that we're treating an averted layoff (i.e. a reduction of jobless claims by one) as the equivalent of a new job. 


The equation reads y = -0.1397x + 751,424. This means that for every $1 million dollars (x-axis is denominated in millions), the Fed can apparently reduce weekly jobless claims by 0.1397 people. The inverse of this ($1mn / 0.1397) is $7.16mn. In other words, it costs the Fed $7.16 million dollars to reduce jobless claims by one person a week. Now, let's factor in that there are 52 weeks in a year, and that suggests that it costs the Fed $137,692 to avert one annual layoff (create one new job). That sounds like a lot of money considering that median per capita annual income for employed people was $41,663 in 2011. It costs the Fed 3.3x the average private sector annual income to prevent one private sector job loss.


It's widely held that the Federal government is inefficient, but just how inefficient is it? The Federal government spent an average of $64,781 per person in payroll on civilian employees in 2010, according to the US Census Bureau. In other words, it costs the Federal Government about 1.5x as much to employ someone as the private sector, and it costs the Fed about 2.1x as much to avert a private sector layoff as it does for the Federal government to hire someone. 


QE3 expectations are running high, and the below chart should provide a framework for thinking about its potential impact on jobless claims, when and if the size of the program is unveiled. For reference, a $500 billion program could be expected to reduce weekly initial claims by 69,832. That would take claims down to around 300k from their current 370k. This would be good news for lenders on the credit front; though, curiously, we showed last week that in the last two years the correlation between the price level of the XLF and jobless claims has been effectively zero.


In the second chart below, we show the relationship between the S&P 500 and jobless claims - another tight fit. We showed last week that weekly initial claims and the S&P 500 have an R-squared of 0.8866 from 2007 through present. The equation there is y = -0.0021x + 2128.2. Assuming an initial claims level of 300k, the equation of the line would suggest an S&P 500 level of 1,498.2. Obviously, many things could cause these relationships to breakdown or decouple. 






The Details on This Week's Print 

Initial claims rose 6k to 372k last week from 366k, but only 4k after incorporating the 2k upward revision to the prior week's data. Meanwhile, rolling claims rose by 3.75k to 368k. 


A bright spot in this past week's print is that for the second week in a row rolling NSA claims widened their YoY improvement, this week moving to -8.3%, vs -7.8% the week prior. This is a healthy sign.










Joshua Steiner, CFA


Robert Belsky



Ahead Of The Fed







Everyone wants to chat with Angela Merkel these days. Today, it is French President Francois Hollande, who is discussing potential outcomes for Greece and the possibility for a default as the country prepares to release a report next month detailing its finances. Greek Prime Minister Antonis Samaras will be meeting with Merkel on Friday. While no earth shattering headlines have come out of Europe in the past week, the fact of the matter is that the situation with the Eurozone continues to worsen as Germany’s ability to prop up the rest of the region dwindles. The only way out of this mess is to formulate a plan that will get countries like Greece and Spain back on a long-term, sustainable path to growth and fiscal sustainability.




Ahead of the Federal Reserve’s infamous Jackson Hole meeting next week, we went short gold and long the US dollar in the Hedgeye Virtual Portfolio yesterday. We believe that any action that the Fed may or may not take is already priced into the market for the most part and thus, the timing is right for us to initiate positions ahead of the meeting. While we’re of the opinion that the Fed will not introduce another round of QE, there’s not much to do at this point but watch and wait for the Fed to make its next move.




Goethe would be pleased with this term we’ve coined this morning. Like the book, Dr. Faust makes a deal with the devil and in exchange for his soul, experiences the pleasures of the world and unlimited knowledge. We think that buying equities with the VIX at 15 combined with no volume rallies is similar to making a deal with the devil or in this case, central bankers.






Cash:                  UP


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  DOWN


Int'l Currencies: UP   








Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TAIL:      LONG            



The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TAIL:      LONG



LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TAIL:      NEUTRAL







“"My mom used to tell us, Carl, put on your shoes. Oscar [Pistorius], put on your legs, so I grew up thinking I had different shoes." Fav #Olympic quote.-@LewisPugh




“It is easier to forgive an enemy than to forgive a friend.”–William Blake




$1665/ounce. The price of gold, which is hitting 16 week highs amid hopes that the Federal Reserve will provide additional stimulus.



Early Look

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Faustian Investing

“In the end, you are exactly—what you are. Put on wig with a million curls,

Out the highest heeled boots on your feet, Yet in the end you remain just what you are.”



Today is August 23rd.  To many of you stock market operators, it is just another day of finding compelling investments and tweaking those market exposures.  But for those of you who didn’t know, it is also National Compliance Officer Day.  So take a few minutes and go see that guy or gal who runs your compliance department, who you typically like to avoid, and give them a big thank you.


One of the first hires at Hedgeye was our compliance officer, Rabbi Moshe Silver.  Not only would I put his knowledge of the compliance up against anyone’s, but he is also kind of funny.  By kind of I mean he tells jokes, even if they aren’t all funny.  In all seriousness, Moshe, on behalf of all of us, thank you for your fine work as our compliance officer and teammate.


Now that I officially have my compliance officer off my back for a few months, let’s get back to the global macro grind.  A topic I want to start with today is China.  Maybe you’ve heard of it? It’s the country that has taken a massive amount of economic market share over the last two decades.  I just wanted to flag a few interesting nuggets from China over the last couple of days.  They are as follows:

  • Chinese iron ore prices are at their lowest levels since 2009 and mills are beginning to default on supply contracts;
  • Zhang Honxia, chairman of China’s largest cotton-textile maker, said: “The Chinese economy is only at the beginning of a harsh winter.  We are in worse shape now then compared with 2008-2009.”;
  • Iron ore output in China is down 8.1% in July;
  • The Shanghai Composite hit a three-year low yesterday;
  • Japanese exports to China in July were -11% year-over-year; and
  • The IMF has estimated that China’s capacity utilization has fallen to just 60% versus 80% in the pre-crisis era.

To be clear, I didn’t hand pick those data points to paint some bearish mosaic.  They are actually just what I wrote down in my notebook and, candidly, they are a little depressing as it relates to Chinese growth.


Last night’s PMI readings were of similar nature, if not worse, for China.  In aggregate, the PMI for August fell to 43.0 from 45.1 in July.  The specifics were even more dreary, new orders fell to 46.6 from 48.7, new export orders slumped to 44.7 (the lowest reading since the financial crisis), and inventories rose to 53.6.  Inventory up and orders down are a toxic mix for any company, let alone the world’s second largest economy.


Despite this plethora of negative data points, the equity markets keeps grinding higher.  Perversely, bad news is good news because bad news means more central bank easing.  The only term I can really think of for this type of investing (and no offense to those of you that are profiting from it) is Faustian Investing.


As many of you know, Faust is a protagonist in a classic German legend.  He is a very successful scholar, but like many successful people, he wants more.  As a result, Faust makes a deal with the devil and exchanges his soul for unlimited knowledge and worldly pleasures.  To me, buying equities at a VIX of 15.1 on hopes of further easing from central bankers feels like a deal with the devil.  Incidentally, there is a gentleman named Jon W. Faust who is a special advisor to the FOMC Board of Governors.  And I couldn’t make that up even if I wanted to …


Speaking of easing, many have asked our view of whether some incremental news on the monetary policy front could come out of Jackson Hole next week.  I will touch on that in a second, but let me just start with this, it is likely priced in.  The SP500 is up 11% in almost a straight line from the lows of the summer into Jackson Hole.  And from interacting with our many subscribers and even more followers on social media, this is the “catalyst” people are talking about.


Now, as to whether the Fed will actually do anything next week is a different question.  The key economic takeaway yesterday from the release of the FOMC’s minutes was that, “economic activity increased at a slower pace in the second quarter than earlier in the year and that labor market conditions had improved little in recent months.”  So as a result:


“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.” 


There you have it: the Fed is poised to ease!  I’m just not sure it will be at Jackson Hole next week.  The last time Bernanke announced action at Jackson Hole was QE2 in 2010.  At that point, equity markets had undergone a serious two month sell off, the government had just lowered its reading Q2 2010 GDP growth to 1.6%, and broad economic indicators were more anemic than they are now (we will have a detailed post on this later today). 


So in summary, we think any potential action at Jackson Hole is both unlikely and also priced into equities.  To express this from a non-Faustian investing perspective, yesterday in the virtual portfolio we bought the U.S. dollar and shorted gold.


The greater question, though, is whether incremental easing will have any impact on economic activity. In the Chart of the Day below, we show both major recent Fed policy announcements in Q3 2007 and Q3 2010 and subsequent global economic activity.  In both instances, growth slowed and inflation accelerated.  Be careful what you wish for from those devilish central bankers.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are 1, 113.71-116.12, 81.41-82.11, 1.23-1.25 (TREND resistance = 1.26), 1.66-1.75% and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Faustian Investing - Chart of the Day


Faustian Investing - Virtual Portfolio

Grass Money

This note was originally published at 8am on August 09, 2012 for Hedgeye subscribers.

“But you go through and scare the game and your cattle eat the grass so the buffalo leaves and the Indian starves.”

-Quanah Parker


That’s one of the most important quotes from one of the most important leaders of 19th century Western American history. I’d bet that a large percentage of Americans don’t know who the Principle Chief of the Comanches was (or why what he did for the US cattle business between 1870-1884 was so critical).


That’s why I read so much history. It helps me contextualize longer-term investing themes within the boundaries of how humans are forced to make short-term decisions. Ultimately, the Comanches traded their long-term liberties for short-term “Grass Money.” If you know anyone begging for bailouts, for the love of the country, please ask them to think about that.


As S.C. Gwynne reminds us at the end of Empire of The Summer Moon, the same kind of question should be on your mind this morning about devaluing your hard earned currency for the sake of short-term asset price inflations - “whether or not the Indians should do what everyone else in America did: lease.” (page 297)


Back to the Global Macro grind…


If Grass Money killed the buffalo, Fiat Fool Money is going to kill whatever is left of your “free” markets. On the heels of China and India reporting another round of #GrowthSlowing data overnight, “futures rally on hopes for Chinese stimulus.”


Alrighty then. I guess we’ll suspend economic gravity for another day.


Here’s the China data, in context:

  1. Industrial Production growth = +9.2% y/y vs +9.5% in June of last year
  2. Retail Sales growth = +13.1% y/y vs +13.7% in June of last year
  3. Fixed Asset Investment growth = flat y/y at 20.4%



A)     On the margin (where risk managing macro matters most) growth continues to slow

B)      These are hardly the “freak-out” recession or stagflation type levels of growth requiring a Geithner-like bailout

C)      Chinese stocks were up a whopping +0.6% on the “news” (still down -12% from where they were in May)


In May, not only Chinese growth, but global growth really started to accelerate on the downside. That’s why almost every major stock market in the world stopped going up in March-April. Markets discount future events.


But what are they discounting now?


A)     The long-term (TAIL) of lower-highs on lower volume (bearish)

B)      The immediate-term (TRADE) short squeeze (bullish)

C)      The ongoing hope that bailouts will earn everyone a year-end bonus sticker


Hope, of course, is not a risk management process. Timing matters. If you bought beta (the Russell2000) in March-April, you’ve lost money. If you bought the wrong stocks (MCD, PCLN, CAT, etc.) in March-April, you’ve lost a lot of money.


This morning you either buy or sell. And I think that if you buy beta today (SPY or IWM – pick your major US index), come September-October, you’ll lose a lot more money too.


Rule #1, don’t lose money.


Rule #2, don’t forget Rule #1.


Rule #3, don’t smoke Grass Money when central planners are trying to have you forget Rules #1 and #2.


My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Russell2000, and the SP500 are now $1603-1624, $108.03-113.18, $81.72-82.64, $1.22-1.24, 788-803, and 1386-1408, respectively.


Bes of luck out there today,



Keith R. McCullough
Chief Executive Officer


Grass Money - Chart of the Day


Grass Money - Virtual Portfolio

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