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Weimar Nikkei

This note was originally published at 8am on May 30, 2013 for Hedgeye subscribers.

“Economics is haunted by more fallacies than any other study known to man.”

-Henry Hazlitt


That’s the opening sentence to one of the best introductory books on markets that you’ll ever read: Economics in One Lesson. Hazlitt wrote the book in 1962, then republished it again in 1979. The quote is timeless. It’s also cyclical.


Our everything Japan Jedi, Darius Dale, and I spent the day seeing clients in Boston yesterday and we had some colorful debates about what both the New York Times and The Economist are all of a sudden championing as “Abenomics.”


To be crystal clear on our conclusion on how we think this ends for the Japanese people: in tears. Never mind a country that starts doing it with a quadrillion in debt, there has never been a country in the history of humanity that has devalued their way to long-term economic prosperity. Championing Japan’s economics today is the equivalent of cheering on the Weimar Republic circa 1924.


Back to the Global Macro Grind


The exciting thing about getting long the Weimar Republic’s stock market in the early 1920s is that you would have crushed it on the long side. The devastating thing was the other side of the trade – The People, their liberties, and purchasing power got crushed too.


Try some anti-gravity (economic or physical) exercises at home, and let me know how it ends. As a general rule, what goes up comes down, fast. The Yale Economics Department didn’t teach me that, btw. Incredibly, Keynesians believe they can “smooth” gravity.


The Weimar Nikkei was down another -5.2% last night. It’s down -13% from its Policy To Inflate high of May 22. That’ll leave a month-end mark. So will the implied volatility this kind of a move perpetuates throughout our interconnected global macro ecosystem.


What is a Policy To Inflate?

  1. A Policy To Inflate is an explicit (and implicit) strategy to debauch and devalue the currency of your people
  2. Bernanke is the “innovation/communication” dude who taught the Japanese to roll this out (without calling it what it is)

How do you devalue?

  1. As Bernanke’s boy, Paul Krugman, suggested to the Japanese in 1997, you need to “PRINT LOTS OF MONEY”
  2. And, ideally, have your conflicted/compromised politicians spend their brains out on borrowed moneys, at the same time

Then you have to overlay the almighty “communication tools” (i.e. central planners whispering inside info to “consultants” who then tell fund managers and/or bark about how much more you can print if/when you feel like the stock market needs more juice).  


This communication tool thing has the potential to be a lot more powerful today than it was for the Germans in the 1920s, primarily because the distribution pipe for our conflicted/compromised media is exponentially larger.


Remember, any lie can live for as long as people are dumb enough to believe it. I don’t think the media is as dumb as they are cornered. If they don’t broadcast this Fed, BOJ, and ECB propaganda, they lose access to the only meaningful content they have left.


BREAKING NEWS: central planner A says B to reporter C in the WSJ and/or English Major D @CNBC – markets react!


People who are paid to believe lies inspire us. So we are going to publish the Hedgeye Risk Management Top 10 things a hard core Bernankian is going to tell you in a meeting about the benefits of 0% interest rates and burning your currency.


At the top of the list will be things like “exports”, “competitiveness”, etc. These aren’t new arguments. But what’s fascinating about them is that they are the same fear-mongering and regressive arguments that central planners have been making since the 1920s.


Losers make excuses when their plans aren’t working. For Abenomics to work, we need to see sustained real (inflation-adjusted for local currency) economic growth.


In the short-term, they might get the illusion of that – it’s called inflation. In the long-run, what do they care about what they really get? On that score they’d agree with Keynes too; in the long-run they (and the Weimar Nikkei) will be dead.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, VIX, Nikkei225, and the SP500 are $1361-1424, $101.06-103.98, $83.31-84.61, 100.41-103.69, 2.01-2.18%, 12.35-15.11, 13506-14920, and 1641-1674, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Weimar Nikkei - Chart of the Day


Weimar Nikkei - Virtual Portfolio

Paying The Price

“Somebody had to pay.”

-Lloyd George


That’s what Britain’s Prime Minister had to say about German reparations at the Paris Peace Conference of 1919. He added, “If Germany could not pay, it meant the British taxpayer had to pay. Those who ought to pay were those who caused the loss.” (Paris 1919,pg 181)


What George forgot to mention was his founding of the British welfare state; part of the British bill had to cover government spending. The Germans didn’t like that. They didn’t like the pomp of John Maynard Keynes floating around Paris smoking the peace pipe either.


Oh yes, my friends, there are roots to this central planning Gong Show. They run far deeper than through Krugman’s craw. Japan is going to learn that the hard way now. Indeed, someone needs to pay the price. For the last decade American, European, and Japanese politicians have tried imposing that tax on their people via currency devaluation. Now the timing is ripe for politicians to pay the piper.


Back to the Global Macro Grind


To be crystal clear on our conclusion on how we think this ends for the Japanese people: in tears. Never mind a country that starts doing it with a quadrillion in debt, there has never been a country in the history of humanity that has devalued their way to long-term economic prosperity. Championing Japan’s economics today is the equivalent of cheering on the Weimar Republic circa 1924.”


The title of that Early Look was “Weimar Nikkei.” The date was May 30th, 2012. Today, the Japanese stock market is crashing.


To crash or not to crash, remains the question. Darius Dale and I get into this debate with clients all of the time – “so, when do you guys think this all hits the fan?”, “can’t the Japanese keep this going for a little while longer?”


It’s a very intellectual debate because all of Wall Street is trying to figure out how long a failed team of politicians (we call Abe and Aso the Keynesian Duo) is going to be able to suspend economic gravity.


And maybe that’s why even a hockey and football player (Darius was a 325lb offensive lineman at Yale) can remind you that there’s nothing intellectual about Krugman and/or Abe’s Policy To Inflate at all. It might sound clever, but as a practical matter it’s just dumb.


So what’s the risk to the Japanese completely screwing this up?

  1. The currency market stops believing this will end well (i.e. in sustained Japanese economic growth)
  2. The Yen rips and the US Dollar falls
  3. The Correlation Risk (USD vs SPX = +0.84 on our TREND duration) goes squirrel

I’d say those are some pretty big risks.


But don’t blame the politicians. Don’t ask them to pay the price. This isn’t the time to be talking about pounds of flesh or anything at all like that. Instead, let’s just watch the country where this whole money-printing experiment started (Japan) implode on the world stage.


The context of central planning history is critical:

  1. Post 1913 Federal Reserve Act gave birth to Bloomsbury flower power act of John Maynard Keynes
  2. Paris Peace Conference 1919 gave a platform for government spending gurus to lay the railway tracks of political plunder
  3. Post 1971 Nixon abandoning the Gold Standard, 1997 was a no brainer for Krugman to tell Japan to “PRINT LOTS OF MONEY”

To be fair, going back to the 13th century, free-market folks like Genghis Kahn have been fighting the aristocracy of kingdoms and political plunderers. So the idea that Charles de Gaulle devaluing his people’s currency was going to fail inasmuch as the Weimar Republic’s did and/or the 2013 Japanese version of the same will may be consensus amongst people who have studied history.


But who cares about causality (central planners), let’s talk correlation – this is where this market’s risk is at!

  1. As soon as the Japanese Yen snapped our 95.85 TREND line, the Weimar Nikkei went squirrel last night
  2. Closing down -6.4%, that puts the #WeimarNikkei in crash mode (-20.4% since May 22nd!)
  3. When the big stuff starts snapping and crashing like that, we get out of the way

Actually, we got out of the way before it happened – think Hedgeye-style “Waterfall”  - and how we proactively risk manage the oncoming entropy of a burst of interconnected H20 crashing over the damn. #oncoming!


With time this Correlation Risk (driven by political causality) will burn off – but not today; water doesn’t burn:

  1. USD/YEN snaps 95.85 TREND line as US Dollar Index snaps 81.21 TREND line
  2. Weimar Nikkei’s TREND line of 13,848 #snapped
  3. China, Hong Kong, Germany – all of their Equity markets are over the waterfall now too (bearish TREND)

Most of this isn’t new. It’s just all happening faster now. That’s how risk works – it happens fast. This is big water, moving real fast, and I can assure you that most of the macro “tourists” out there who didn’t respect either the Yen or Nikkei signal are now very wet.


What does this mean for our asset allocation?

  1. We already have a 0% asset allocation to Fixed Income (Bond Yields aren’t going down on this fyi)
  2. We already have a 0% asset allocation to Commodities (Gold is down on this, fyi)
  3. We’d already cut our US Equities allocation in half versus its max (on Monday)

Since we are bearish on #EmergingOutflows (Emerging Markets), we don’t have to deal with that this morning either. What we need to make a decision on is whether to get out of US Equities altogether.


Here’s how I think about US Equity Market risk:

  1. It all starts and ends with the Dollar; the TREND is broken (but can be recovered with time; long-term TAIL support = 79.11)
  2. SP500 TRADE line of 1624 is broken, but TREND support of 1583 remains intact
  3. US Equity Volatility TREND resistance of 18.98 is going to be under siege this morning

Volatility, entropy, convexity – this is the stuff that makes people go squirrel. Yes, I’ve used the squirrely metaphor 3x this morning because that’s what my inbox looks like. We are getting a lot of questions on this. Which means institutional clients are in the water.


My first move this morning will be to do nothing. We’re not wet, so we can watch this political gonger play out a little before we let the market tell us which of these interconnected TREND risks confirms.


As for who ultimately pays the price for all these unintended consequences, I formally nominate Bernanke, Kuroda, and Aso. Especially for that Aso guy, ripping their countrymen a new one via currency devaluation is something they should all be ashamed of.


Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $100.36-103.94, $80.46-81.21, 93.69-95.85, 2.06-2.27%, 14.61-18.98, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Paying The Price - Chart of the Day


Paying The Price - Virtual Portfolio

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TODAY’S S&P 500 SET-UP – June 13, 2013

As we look at today's setup for the S&P 500, the range is 29 points or 0.71% downside to 1601 and 1.08% upside to 1630.           










  • YIELD CURVE: 1.87 from 1.90
  • VIX closed at 18.59 1 day percent change of 8.90%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Advance Retail Sales, May, est. 0.4% (prior 0.1%)
  • 8:30am: Init Jobless Claims, June 7, est. 346k (prior 346k)
  • 8:30am: Cont Claims, June 1, est. 2.978m (prior 2.952m)
  • 8:30am: Import Price Index, May, est. 0.0% (prior -0.5%)
  • 8:30am: Import Price Index Y/y, May, est. -1.4% (pr -2.6%)
  • 9:45am: Bloomberg June U.S. Economic Survey
  • 10am: Business Inventories, April, est. 0.3% (prior 0.0%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to purchase $2.75b-$3.5b in 2020-2023 sector
  • 1pm: U.S. to sell $13b 30Y bonds in reopening
  • 7:50pm: Bank of Japan meeting minutes for May 21-22


    • 8am: U.S. Energy Assn holds Energy Efficiency forum, w/ speakers Reps. Cory Gardner, R-Colo.; Peter Welch, D-Vt.; Paul Tonko, D.-N.Y.; Gov. Jack Markell, D-Del.; Senate Energy and Natural Resources Chairman Ron Wyden, D-Ore.
    • 10am: House Ways and Means Cmte holds hearing on taxation of multinational corporations
    • 10am: Senate Banking Cmte hears from FDIC Chief Economist Richard Brown, FDIC Inspector General Jon Rymer on lessons learned from financial crisis for community banks
    • 10am: FBI Dir. Robert Mueller testifies before House Judiciary Cmte oversight hearing
    • 10am: House Energy and Commerce panels holds hearing on DOE budget
    • 11am: Natl Governors Assn, Natl Assn of State Budget Officers hold conf. call briefing on biannual fiscal survey of states
    • 1pm: House Financial Svcs panel meets on “The Impact of Intl Regulatory Standards on the Competitiveness of U.S. Insurers.”
    • 2pm: House Judiciary holds hearing on SAFE Act, which would grant states, localities authority to enforce federal laws


  • World Bank cuts global outlook on China slowdown, Europe
  • Clearwire board backs Dish’s bid over Sprint’s lower offer
  • House passes bill to limit CFTC’s cross-border swaps authority
  • IBM’s U.S. job cuts reach at least 1,300, employee group says
  • RBS tumbles after CEO departure as 2,000 job cuts planned
  • Apple’s Eddie Cue key to defense of e-book price-fixing case
  • U.K. lawmakers slam Google over “contrived” tax strategy
  • EU extends review of GE-Avio deal after commitments offer
  • Boeing loyalists’ patience tested; Airbus wide-body takes off
  • Retail sales in U.S. probably rose on pickup in car purchases
  • Nvidia CEO sees sales of chips for cars increasing to $1b
  • U.K. urged by EU to probe currency rigging in Libor’s wake
  • BlackRock wants to enter Danish pension market: Borsen
  • Tyco’s Kozlowski should be denied new hearing: parole board


    • BRP (DOO CN) Bef-mkt, No est.
    • Casey’s General Stores (CASY) 4pm, $0.62
    • Restoration Hardware (RH) 4:05pm, $0.04


  • Gold Imports by India Seen Tumbling as Curbs Boost Titan’s Costs
  • Silver Faithful Taking $5 Billion Hit in Crossfire: Commodities
  • Copper Resumes Decline as World Bank Cuts Global Growth Forecast
  • WTI Falls for Third Time in Four Days as World Bank Cuts Outlook
  • Metalor Set to Complete Singapore Gold Refinery by Year-End
  • Gold Declines in London After Earlier Getting Boost From Dollar
  • Crop Prices Extend Declines After U.S. Sees Increasing Supplies
  • Robusta Coffee at 17-Month Low on Supply Prospects; Cocoa Drops
  • World Food-Import Bill Seen Below 2011 Record at $1.094 Trillion
  • Ethanol’s Best Performance Since 2006 Falters: Energy Markets
  • Commodity Hedge Funds Said by FAO Finding Profits Harder to Make
  • Green Pool Cuts Sugar Surplus by 23% as Brazil Turns to Ethanol
  • Indonesia Completes Probe Into Freeport Grasberg Tunnel Accident
  • Force Majeure in Indonesia Leaves Japan Copper Smelters Looking






















The Hedgeye Macro Team













Trade of the Day: LNCO

Takeaway: We covered our Linn Energy short (LNCO) at 10:43 AM at $37.42.

Book the tidy 3.9% gain. We are simply risk managing the range in one of Hedgeye Jedi’s Kevin Kaiser's best short ideas. He remains “The Bear” on Linn Energy.


Trade of the Day: LNCO - lnco


Takeaway: WOOF’s fundamentals appear to be improving into 2Q13; we’re leaning long on the stock, but remain on the sidelines for now.

This note was originally published June 07, 2013 at 12:00 in Healthcare


04 JUNE 2013 




Fundamentals Improving

We have been stalking WOOF on the long side for some time given our expectation for accelerating volume trends in 2013.  However, we had been expecting 1Q13 weakness, which is why we have avoided the name to date. 


Fundamentally, our view hasn’t changed.  We’re still expecting a recovery in 2Q13 SS Animal Hospital Metrics; partly because the 1Q13 comp was so difficult, but also because the 2Q13 comp is artificially deflated by utilization pull-forward into 1Q12 from the unusually warm winter.  Additionally, 2H13 will also have additional tailwinds (see link below for more detail)


WOOF: 1Q13 Headwinds Preceding the Recovery

03/15/13 11:52 AM EDT



We are already seeing signs of a rebound.  Veterinary Employment (our best read into WOOF SS Animal Hospital trends and one of two inputs in our WOOF regression model) is accelerating on a y/y basis into 2Q13.  






Stock Setup Mixed 

While 1Q13 results disappointed (worse top-line miss in almost 3 years), the stock rallied on the company's newly-created stock buyback program and a synthetic guidance raise (WOOF began excluding acquisition-related amortization from non-GAAP EPS).


The stock is no longer screening as a clear-cut long given its recent outperformace. However, we have a bullish bias on the stock given our expectation for accelerating organic growth, which do not believe the Street fully appreciates.








POSITION MONITOR: The Hedgeye Healthcare Position Monitor is a reflection of our fundamental view on the stocks listed. The TOP IDEA’s section represents our highest conviction ideas.  


WOOF: MIXED EMOTIONS - position monitor




6/07/13 - Nonfarm Payrolls, Consumer Credit



Thomas W. Tobin



Hesham Shaaban, CFA


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