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Napoleonic Heights

“My downfall raises me to infinite heights.”
-Napoleon Bonaparte
The history of The Emperor Napoleon losing his proverbial clothes is one of my favorites. If the British and Americans aren’t careful with their respective financial systems and currencies, they might start looking a little 19th century French, à la 1815 Waterloo, sometime soon…
Unlike poor Bernie Madoff (who apparently got into a prison brawl in yesterday), Napoleon spent the last 6 years of his life under British supervision on an island.  He wasn’t a fraudster, so they went easy on him, I guess…
But will the world’s central banks go easy on the British Pound and the Burning Buck? The answers to these questions aren’t at all clear. What countries say for political purpose seem to be quite different versus sales they are making in the market. For the last 9 months, I have been spending an inordinate amount of time bantering about Breaking it and Burning it, but that time could have equally been focused on Pounding it – Pounding the Pound that is…
Consider the French versus the British this morning, straight up on one economic score:
1.      France Consumer Prices (CPI) for September came in at -0.4% year-over-year

2.      British CPI for September came in at +1.1% year-over-year

In Europe, not unlike Napoleon when standing alongside other military leaders of his time, one of these things is not like the other. Their heights.
Alongside the Pounding of the Pound comes heightened levels of domestic inflation for British consumers. The Eurozone, on the other hand (which maintains a strong currency policy that’s actually pseudo credible), imports deflation for their citizenry,
I know, I know. These differentials aren’t monstrous, but neither were the competitive advantages that took down Napoleon in 1815 at Waterloo. The New Reality is this: The Chinese have a lot of money that they can invest, wherever they want, and interest rate and currency price differentials matter to them.
My loving Mom’s maiden name was Thiboutot. I went to French-only school until the end of the 5th grade, so please don’t send me nasty-grams about not liking the French!  However, to be clear, next to Italy, France is one of the last places in the old G7 that I would be investing capital right now.
When I look at the G7 countries today (Canada, France, Germany, Italy, Japan, UK, and USA), the opportunities on the French Canadian side look more palatable than on the Parisian side. Canada reported a much improved unemployment rate of 8.4% this past month (down from 8.7% prior), and looks poised to play an Aussi Rules rate game in the near future. If you show me a rate of return that is greater than ZERO, I’ll call my Chinese boys in to give you a look-see.
Alongside the CRB Commodities Index hitting its YTD high yesterday, so did the Canadian Loonie. As America and Britain Burns and Pounds their respective currencies into the political sands of Capitalism Lost, the world is still open for Global Currency Diversification business.
If you were (or are) Chinese, and tomorrow you read the following two headlines, what currency would you buy?
1.      Brown’s Bank of England (BOE) expands asset and bond purchase programs

2.      Shirakawa’s Bank of Japan (BOJ) withdraws corporate debt and commercial paper programs

This isn’t that complicated folks. This is the increasingly interconnected world financial system that you live in. There are countries like Japan that have new political leadership for the 1st time in 55 years that could actually change their longstanding and compromised monetary policy, while those countries like America and Britain take Japanese like politicization of monetary policy to Napoleonic Heights!
I am sure some of the smartest Wall Streeters on the planet can explain to me exactly why the Japanese Yen going up “isn’t fundamental.” At the end of the day though, the price of the Yen is at close to a 9 month high for more reasons than those that explain a portfolio managers revisionist performance problems.
If the Japanese say “No-Morah” to limitless lending, the New Heights for Japan’s currency are still ahead of us. Particularly if the British Pound and US Dollar move to New Lows…
Yesterday, that ole Buck was Burning again. Most things priced in bucks hit New Heights, as a result. While the Nasdaq had an Outside Reversal day (breaking out to new YTD highs intraday, then reversing intraday to close at a lower-high), the SP500 closed up for the 6th day in a row to a New Height of 1076.
I’ve been wrong in missing most of this move in US Equities for the last 6 days. I’ve been right in being long the associated protections against currency imported accelerations in inflation expectations (I’m long an 11% position in TIPs, and still have a 4% long position in Gold).
I’m waiting to see if the US Dollar can continue to make higher-lows. I am waiting to see if the US Federal Reserve has a spine in seeing these New Heights in marked-to-market leading indicators (oil, TIPs, gold, copper, Russian stocks, Chinese demand, JPM earnings, etc…). I’m waiting to see if this Global Asset Allocation Diversification is both America and Britain’s Currency Waterloo…
My immediate term support/resistance lines for the SP500 are now 1053 and 1086, respectively.
Best of luck out there today,


EWT – iShares Taiwan
With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

EWG – iShares Germany
Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

CAF – Morgan Stanley China Fund
A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

CYB – WisdomTree Dreyfus Chinese Yuan
The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

XHB – SPDR Homebuilders We were the bulls on a Q2 housing turn but, as the facts change so do we: now we are getting cautious on 1H 2010 US Housing. Rates up as access to capital tightens is not good for new home builders as we enter into a new year and series of potential catalysts for renewed pressure in the secondary market, including the expiration of the $8,000 tax credit.

USO – US OIL Fund WTIC Oil traded just north of our overbought line on 10/12. With the US Dollar hitting another higher-low, we shorted more of oil’s curve.

EWJ – iShares Japan
While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

SHY – iShares 1-3 Year Treasury Bonds
 If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


DPZ EARNINGS - DPZ is scheduled to report Q3 earnings before the market opens.  The consensus same-store sales estimates are Domestic company-owned (0.9%), Domestic franchise +1.2% and International +5.0%.  The Q3 consensus EPS estimate is $0.15 on $308.9 million in revenues.


MORE COMPETITION - While supermarkets have long been viewed as serious competition for restaurateurs, upscale grocery chain Wegmans Food Markets Inc. is pitting itself directly against foodservice operators with the debut of the brand’s first in-store, full-service restaurant.  Called The Pub, the restaurant is located in the chain’s newest outlet, the 132,000-square-foot Wegmans in the Providence Town Center shopping mall in Collegeville, Pa.  The restaurant is housed in the store’s Market Café area, which offers shoppers a wide range of prepared foods for takeout or eat-in, such as burritos, panini sandwiches, sushi, pizza and a buffet of Asian-inspired dishes.  The Café area, which includes The Pub, has combined indoor and outdoor seating for 300 customers.


TIME TO MOVE ON - Monday night's "Larry King Live," show was spent debating the following question: Should meat, and most specifically hamburgers, be a part of the American diet?  The show is unwatchable!


SCORNED WOMAN - Carly Simon has filed a lawsuit against Starbucks for withdrawing involvement in the company's music label, Hear Music, just five days before the singer's album was due to be released.  She is suing for deceit, tortuous interference and unfair business practices.


THE BATTLE OVER PREMIUM BURGERS – DENN has introduced a hand-pressed burger aimed at fast-food diners.  The “Better Burgers” come in five varieties, including a Western burger that contains similar ingredients as those found in Carl’s Jr.’s famous Western Bacon Cheeseburger.  The price point is very competitive to the fast feeders.  DENN is offering a burger combo meal for $6.99. 







Another Outside Reversal: Nasdaq Levels, Refreshed...

I am writing this at 330PM EST, so please bear with me if the levels I address in this note don’t hold on the close. Closing prices are what matter most in our macro models…



Unlike Friday’s fresh new high for the Dow, the YTD closing high for the Nasdaq still dates back to the one made on September 22 at 2146. This morning, alongside a breakout to new YTD highs for the SP500 (which continue to hold up here), the Nasdaq had what some quants who measure price momentum call an Outside Reversal.



An Outside Reversal is what you see in the chart below - an intraday breakout to new YTD highs, followed by an intraday reversal (selloff), and a market closing price that sits below the prior YTD closing high.



After we saw the Outside Reversal in the SP500 a few weeks back, you saw what happened. The SP500 corrected by over 4% in the days that followed that reversal. I have no support for the Nasdaq between here and 2096. It would be healthy to see the Nasdaq correct to that line and recover again. After all, it is up +36% YTD.



This is an intraday risk management factor that is worth taking the time to point out.





Keith R. McCullough
Chief Executive Officer


Another Outside Reversal: Nasdaq Levels, Refreshed... - a2



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Deltas in Employed Canucks


Canada reported a monster employment print today.  Specifically, Statistics Canada reported that the employment in Canada was up 31,000 in September and that the unemployment rate decreased to 8.4%. This was the first monthly decline in unemployment in Canada since the labor market started to turn down in the fall of last year and is Canada’s largest gain since May 2006.



The unemployment rate in the United States, based  on data from the Bureau of Labor Statistics, was  9.8% for September.  The delta between Canada and the United States is therefore currently at 1.4%.  This is the largest delta since this data has been tracked, so largest delta ever.  As we wrote on 6/8/2009 in a note entitled, “The World Cup of Unemployment: Canada Versus United States”:



“Our Lead Desk Analyst, Andrew Barber, looked at unemployment rates going back in both Canada and the United States about thirty years to 1979.  Over that entire time period, the United States has, on average, been 2.51% more employed.  That is, the unemployment ratio has been lower by 2.51%.  The chart comparing these long term rates is attached below.



For the past nine months, unemployment in the United States has been higher than in Canada.  The only other period in which that was the case was from 1, which was a period in which Canada was between 0.1% and 0.4% more employed.  As of the most recent data points, Canada is currently 1.0% more employed, which is a full 3.51% above the thirty year average between the countries."



Ever, as they say, is a long time.  And when economic shifts happen for the first time ever, it is a worthy call out.  Canada’s fiscal health and its leverage to commodity industries have obviously been a major advantage for her unemployment statistics.



The implication of this better than expect employment report from Canada will likely be another decoupling from the United States when it comes to interest rates.  Much like their commonwealth brethren, the Aussies, it is likely that the Canucks taking a real hard look at raising rates based on this print.



Daryl G. Jones

Managing Director


Deltas in Employed Canucks - a5



PSS: Positive Price Gap Trend

PSS: Positive Price Gap Trend

Competitive product pricing spreads are key at PSS. Recent trends look positive.



One thing we know is that PSS targets its pricing to be about 20% below competing product on a like-for-like basis.


When the spread widens, it usually is indicative of either PSS getting more aggressive on price, or the marketplace getting less competitive.


On the flip side, when PSS’ discount to peers narrows, it suggests either a more competitive and risky marketplace, or a more confident (and offensive) Payless. That’s what we think we’re seeing today.


We won’t begin to suggest that our tracking analysis of shoe styles across low-price competitors is fully representative of a 3,000+ store chain with thousands of SKUs. But we do think that it is a directionally relevant coincidental indicator.


In aggregate, we’ve seen PSS’ discount on key styles come narrow over the past two weeks. Did the company plan this around its analyst meeting to appear to be less promotional? We don’t think so. We also don’t think that the company is about to get steamrolled by having to lower its prices. In fact, one of the drivers for the recent trend is not having the $5.99 intro price point promotion negatively impact the mix today as much as it did in Aug/Early September.


Overall, this is a small, but positive supportive nugget to our above consensus estimates.


PSS: Positive Price Gap Trend - pss1


PSS: Positive Price Gap Trend - pss2

Long Taiwan: Floodgates Waiting To Open

“….the delicate balance across the Taiwan Strait will continue to Challenge the wisdom and strength of the government in Beijing” 


Su Guaning, President of NTU, quoted in an interview in The Business Times Singapore on how China’s economy will evolve in the coming decade.



The gravitational pull of the mainland is becoming ever stronger for Taiwanese companies in advance of the historic memorandum of understanding on financial supervision that is expected to be signed in November. This is just the latest link between the two states since Beijing seized on the global recession as an opportunity to thaw relations. As “panda diplomacy” has evolved beyond symbolic gestures with the introduction of direct trade and travel and direct investments by PROC companies, the pace of development has quickened.



In the past month the number of Taiwanese firms seeking to take advantage of the accord by establishing partnerships on the mainland have grown rapidly, with prospectors ranging from the Taiwan Stock Exchange and leading brokerage Fubon Securities opening discussions with Shanghai counterpart to Sanyang Industry’s partnership with Chinese bus manufacturer Xiamen King to develop modern coach line vehicles for the mainland market. 



Rising from only 3% of total exports a decade ago to nearly 30% of the total today, the rising mainland consumer base has become THE critical growth market for Taiwanese technology and communications firms.  This closer relationship is driving more than just exports, YTD the TAIX has traded with a strong correlation to mainland equities, racking up an R2 just shy of 90% YTD (see charts).


Long Taiwan: Floodgates Waiting To Open - a1


Long Taiwan: Floodgates Waiting To Open - a2



As the economic ties continue to draw the island nation closer to Beijing, it is important to note that the political and cultural obstacles remaining are immense. Officially the PROC government regards the island as a rebellious district rather than a separate state (let alone sovereign nation). A recent reminder of the long standing military tension was the conviction of US DOD employee James Wilbur Fondren two weeks ago. Fondren had been passing on sensitive pentagon documents from 2004 to 2008 regarding strategic planning for joint US/Taiwanese joint defense to a Taiwanese citizen posing as an operative for his government who was in fact an agent for Beijing. 


We are long Taiwanese equities via EWT as a tactical play on rising Chinese consumer demand. In the long term, for better or worse, the two economies are intertwined. It remains to be seen if the common economic advantages of the current initiatives will lead to a political partnership equally as equitable.


Andrew Barber


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