Aussie-Rules Economics

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

-F.A. Hayek


Either the Reserve Bank of Australia’s Chief, Glenn Stevens, has it really right these days or he is setting himself up to get this really wrong. Economics is not a science of laws. After all, as American historian Ben Bernanke recently told Congress: “Monetary policy is an art.”


It’s no secret that I am fond of Mr. Stevens ability to stand outside the political arena in making tough monetary policy decisions. He has raised interest rates multiple times since the narrative of a Great Wall Street Compensation Depression began. In doing so, he has actually seen the Australian unemployment rate drop and domestic consumption rise.


No, these aren’t Japanese or Americans style policies. These are Aussie-Rules Economics, mates. In Australia, the man who runs the place isn’t on 60 Minutes or writing Op-Eds for the Consensus Street Journal either. Glenn did his FIRST television interview last night since being appointed head of the RAB (he was appointed in 2006). Rock-star member of the Global Bubble in Politics this man is not.


When you read his quotes, consider them within the context of Washington’s current buy-in to government bailout Keynesian economics:

  1. “It’s not wise to leave interest rates right down at rock bottom any longer than you need”
  2. “It would be not doing people any favors to have a prolonged period of very low rates and then hammer them unexpectedly”
  3. “I think it is a mistake to assume that a riskless easy guaranteed way to prosperity is just to be leveraged up into property… It isn’t going to be that easy.”

You’d think with a radical hawk flying around the East side of this world like this that his stock market would be collapsing? Or would you? What is the best way to measure a country’s long term health anyway – by the recent up or down tick of its stock market? How about the strength of its currency; its bond market; or its international credibility?


Maybe I have a bias towards Glenn Stevens because he obtained his Masters in Canada (University of Western Ontario). Maybe I’m just a stickler for getting a rate of return greater than zero on moneys I have in a US Savings account for my children. Heck, maybe I’ll go hire another 30 people during the next economic downturn without government support if I actually generate some fixed income on those savings!


These are fascinating times by any economic measurement. I often wonder how our accomplished historians running on fear-mongering US politics think about where John Maynard Keynes’ fame came from – challenging the bureaucracy of Perceived Wisdoms that were born out of the last mega-cycle of government excess (the 1920’s in Britain).


Too much to think about on this rainy morning in New Haven. That’s a good thing, but I need to give you some macro meat to chew on in the meantime. Shifting gears, here’s where our Hedgeye macro lines washed out into last week’s end:

  1. The Buck Breakout continued to the upside – the US Dollar Index was up another +1.1% last week, taking its rise since the late November lows to +9.4%.
  2. The Euro was oversold again on the news of another lagging indicator (Portugal’s debt downgrade) – my immediate term risk management range remains 1.33-1.36.
  3. The CRB Commodities Index closed down another -1.8% on the wk and remains below my intermediate term TREND line of 275 (interest rates and US Dollar up hurts).
  4. WTIC Oil finally broke my immediate term TRADE line ($80.78); we sold out of our 3% position in Oil in the Asset Allocation Model on the breakdown.
  5. Volatility (VIX) in US Equities rose +5% on the week, but the VIX remains broken across all 3 of our investment durations (TRADE, TREND, and TAIL).
  6. 2-year Treasury Yields continued to breakout to the upside (we call this the Rate Run-up); the long term TAIL line of resistance at 0.96% is now support.
  7. 10-year Treasury Yields continue in what we call a Bullish Formation (bullish across all 3 investment durations); immediate term TRADE support = 3.71%.
  8. 3-month LIBOR continues to rise 1 basis point at a time and now stands at 0.29%, up +16% from where that reference rate was at the beginning of the month.
  9. 10-year swap spreads went negative for the first time (by 10 basis points); this means said ‘AAA’ rating of American finance is finally under attack by the quants.

On the calendar this week you have 3 big factors to proactively prepare for: the end of the Fed’s MBS bailout program and month/quarter end for the asset management industry on Wednesday; then the US unemployment report on Friday.


I am thankful that US Congress has gone to recess until April 12th. It will give me less morning news-flow to read that saddens me. Aussie-Rules Economics are making me feel better already.


My immediate term support and resistance levels for the SP500 are now 1157 and 1173, respectively.


Best of luck out there today,



Aussie-Rules Economics - Pic of the Day



The S&P 500 was mixed on Friday. At the end of the day, it was clear the character of the rally was weaker at the end of the week than at the beginning. The Hedgeye models still have Energy (XLE) and Utilities (XLU) broken on TRADE and TREND. On the MACRO front, there was some support that the euro-zone reached an agreement on a plan in which they would jointly bail out Greece with IMF help. 


In the US, there was a positive tone set from the better-than-expected final reading of the March University of Michigan Confidence. Final March University of Michigan Confidence was 73.6; higher than consensus 73.0 and up from preliminary reading of 72.5.  That said, confidence in this country continues to make a long term series of lower-highs.


The third report on Q4 GDP came in at 5.6%, which was lower than consensus and the second read, both of which were 5.9%.


The Dollar index corrected 0.54% on Friday, but was up 1.18% for the week.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.59) and sell TRADED (82.52).  The Materials (XLB) benefitted from the weaker dollar as it was the best performing sector on Friday.  Steel stocks outperformed, as the NYSE ARCA Steel Index was up 1.5%.  With crude weaker on Friday, Energy underperformed on Friday and continues to be broken on TRADE and TREND.


The commodity correction continues on the back of anticipated higher interest rates. The CRB was down 0.2% on Friday and down every day last week. 


Consumer discretionary (XLY) outperformed on Friday and was the best performing sector last week.  The retail sector, leads by apparel companies were especially strong. In addition, homebuilders were up on the day; closing higher five days in a row. 


Financials (XLF) only slightly outperformed on Friday, but was the second best performing sector last week.  Last week, the Obama administration introduced a new mortgage plan that seemed to provide support for the XLF. 


The VIX rallied 4.7% last week, but remains broken on all three durations - TRADE, TREND and TAIL.  The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy TRADE (16.01) and sell TRADE (18.45). 


In early trading, crude oil rose for the first time in four days on expectations demand will increase as the global economic recovery gains momentum.  In early trading oil is trading higher for the first day in the last three as the dollar weakens.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (77.79) and Sell TRADE (80.76). 


Gold is higher for a third day in London as the dollar index weakens.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,080) and Sell TRADE (1,116).


In early trading, copper rose to a 2 1/2-month high in London as inventories are declining and a weaker dollar is making all metals more appealing.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.35) and Sell TRADE (3.47).


In early trading, equity futures are trading above fair value despite Friday's late day sell-off and volatility higher last week.  This week's highlight will be the March employment report on Good Friday, though equity markets will be closed.  As we look at today’s set up the range for the S&P 500 is 16 points or 0.8% (1,157) downside and 0.5% (1,173) upside. 


Today's MACRO highlights are:

  • February Personal Income& Spending
  • February PCE Deflator 
  • Mar Dallas Fed Manufacturing activity


Howard Penney

Managing Director













The Week Ahead

The Economic Data calendar for the week of the 29th of March through the 2nd of April is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2



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Politics vs. Pragmatism

“Europe’s problem is not its institutions, its Council, the Commission or Parliaments, the problem is  very often nationalism, populism, and narrow-minded parochial views of people who do not believe in the common project for Europe.” 

-Jose Manuel Barroso, 3/25/10


Late yesterday Jose Manuel Barroso (President of the European Commission) and Herman van Rompuy (President of the European Council) held a press conference in which they stated the willingness of Eurozone member states to take coordinated action with the IMF to “safeguard financial stability” for Greece, and the Eurozone members as a whole.


The “mixed formula” of financial support came without such details as:

  • When Greece, if needed, would receive loans or the value of said loans?
  • How much of the bilateral loan would come from the Europeans versus the IMF?
  • What budget deficit reduction requirements will be issued for other/all member states?

And to the first bullet point van Rompuy responded, “All this, we’ll work it out later.”  Is this policy?


While the Greek market shot up over 4% today and investors’ fears may be allayed for at least a day, Eurozone leaders have done little to address policy measures for the sovereign debt issues of its members.  And surely the debt obligations of the other PIIGS aren’t going away just because the fear of a Greek default becomes yesterday’s news…


To return to Barroso’s quote above, Eurozone skeptics exists. And one could argue that the decision by Eurozone leaders to support Greece in a coordinated fashion—rather than a unilateral IMF-led loan—is born out of the desire of the European community to further substantiate the existence of the Eurozone as an entity. While Barroso as President of the European Commission will put his best foot forward in confirming that the Eurozone has a sound governing body, the fact remains that the Eurozone is young, only 10-years old, and still working through honing policy to benefit the whole.


Clearly, finding consensus on policy from country members with vast histories, and divergent economies and cultures, will remain a challenge. Countries will differ on stance; having a unified currency will put additional challenges (handcuffs) on exercising monetary and fiscal policy measures with such issues like debt restructuring and default.


Equally, imbalances in terms of economic weight and political influence will continue to weigh on decision making. These points were put on center stage with German Chancellor Angela Merkel’s full support of a unilateral IMF-led bailout for Greece. The fiscally conservative Chancellor wasn’t questioning the validity of the Eurozone, but suggesting that Greece continue to work to clean up its own “house” (budget deficit) before monies were placed on the table so as to not reducing Greece’s incentive to issue austerity measures to shave its imbalances. 


Merkel approached the issue from a pragmatic level, conscious of her own political and fiscal constraints at home—confidence in her party’s management has waned in recent months and reaching into German coffers for Greek aid would put further strain on the German taxpayer.


While pundits could endlessly debate the benefit of a large economy like Germany to the Eurozone and vice-versa, we’ll spend our time understanding the dichotomy that exists within the Eurozone, and collectively throughout Europe, to drive our investment decisions.  Despite Greece getting a hall pass for now, in light of the increasing global sovereign debt issues, things continue to shake. 


The charts below show divergence between Germany and Spain based on the DAX vs. the IBEX.  While the IBEX is broken on its intermediate term TREND (3 months or more), the DAX continues to trade above its TREND line. For more on our fundamental stance on Germany, see our note from yesterday titled ‘Frau “Nein”’.


Matthew Hedrick



Politics vs. Pragmatism - DAX


Confidence: Is It Really "A New Season In America?"

What a week this has been. We kicked off the week by having the President of the United States proclaim that this is “A New Season In America”, and I am definitely not going to disagree with him on that. The question is, what’s new for American investors?


  1. Healthcare Reform = higher spending, higher state level deficits (don’t take my word for it – 14 states filed suits against the government for a reason)
  2. Municipal Bond Market “Bid Rigging” is being thrown onto the mat while the SEC’s Greenberg (Muni-unit) sues PA non-profit hospitals for fraud
  3. Insider Trading rings get plastered all over the tape, but at the same time Bernanke’s elixir of cheap money has the 2007 LBO rumor mill picking up speed


The Treasury Bond market is getting crushed; interest rates are breaking out to the upside; and I wonder what all the folks in China and Japan holding $1.6 Trillion in us promises can trust in all of the aforementioned spending and storytelling.


In the chart below, Darius Dale accurately pinpoints that American Consumer Confidence nudged up from the preliminary University of Michigan reading from earlier this month. That said, confidence in this country continues to make a long term series of lower-highs.


Maybe Americans aren’t as naïve as their politicians deem them to be. Maybe they don’t buy into the CNBC mania of evaluating a America’s health on the tick of the stock market.


‘Tis a new season indeed.


Our immediate term support and resistance lines for the SP500 are now 1157 and 1175, respectively. We have been making sales in the Virtual Portfolio all morning into this hopeful stock market strength. Hope is not an investment process that we adhere to.



Keith R. McCullough
Chief Executive Officer


Confidence: Is It Really "A New Season In America?" - CConf1

R3: FINL: Ahead of The Pack



March 26, 2010


After highlighting 15% comp growth thus far in March, FINL added fuel to the fire that is beginning to roar in the athletic footwear industry.





In looking at FINL’s results after the market close yesterday, one could argue the industry indeed saved the best for last. Just take a look at the industry SIGMA chart below, FINL is in a league of its own. Top-line growth of 8% was good, but relative to +1%, +11%, and +13% for FL, DKS, and HIBB respectively it wasn’t the driver of relative outperformance in the chart below – a 20% reduction in inventory was. Now to be fair a significant portion of this is due to the removal of its perennially money-losing Man Alive business in Q2 of last year. With that drag offloaded, the company is poised to exceed recent peak high margins of 8.3% after posting 6.2% in 2009. The other notable highlight in last night’s release is the March comps – up 15.5% quarter to date! That’s compared to a down 1.2% over the same period.  Interestingly, 1Q09 comps were down 3.9% which implies that the comparisons ahead are actually getting easier for the balance of the quarter. As the comp chart reflects below, FINL’s +10% comp was the strongest in the industry with HIBB a close second. Interestingly FINL’s March comp preview suggests HIBB’s guidance of -2%-+2% comps in Q1 could be on the conservative side.


The bottom-line here is that the latest industry data point is in and it’s very positive. We expect performance across the industry to only accelerate into the 1H.


R3: FINL: Ahead of The Pack - SG SIGMA 3 10


R3: FINL: Ahead of The Pack - SGComp Table 3 10


R3: FINL: Ahead of The Pack - SG CompChart 3 10





  • Lululemon noted that its exceptional sales growth in the quarter has left the company chasing inventory, a process that is expected to continue through the Summer. As a result, there are key out of stocks in core items and sizes online and in stores. Additionally, the company eliminated its annual warehouse sale in Canada this January because there was no inventory to support the event.


  • Best Buy pointed out that its online sales grow by 20% in 2009 to $2 billion in sales. Interestingly, 40% of sales for the ecommerce channel were picked up in store by customers. Due to investments in technology and customer service, the company was simultaneously able to reduce customer complaints by 19% vs. the prior year. A key component of the improved service has been the company’s Twitter efforts, which allow consumers to Tweet questions to Best Buy employees and receive solutions in near real-time.


  • Fred’s management noted that is now seeing relative stability from a competitive standpoint in the marketplace, from dollar stores, Wal-Mart, and traditional grocers. However, management went on to note that they believe there is reason to believe there may be an intensification on the promotional front coming soon, and as such they will alter their plans accordingly. In other words, the environment will dictate how promotional they will become to remain competitive.





UK High Street Forecasts Damp Easter - The crucial Easter trading weekend is in danger of turning into a washout, according to high street retailers that have been disappointed with the slow start to March. <>


China Cotton Imports Surge - As the export market of Chinese textiles has been recovering, China imported 221,000 tons of cotton in February, surged by 137.6% compared to the same period a year ago, according to the National Development and Reform Commission. In January this year, the country's cotton imports surged 286% year on year to 301,359 tons. China's yarn output rose 10.1% year on year to 1.63 million tons in February, while its exports of garments and textile products soared 89.3% from a year ago to US$12.64 billion in the month. <>


EU Footwear Body Sues Over Duty Extension - The Federation of European Sporting Goods Industry (FESI) expressed in a statement the European Commission's decision to extend duties on imported Chinese and Vietnamese leather footwear was based on a misguided investigation and analysis. Leading sports footwear labels including Adidas, Puma, Nike, Lacoste and Asics are members of FESI, claiming that the extended duties has cost the industry almost 1 bn euros since 2006. "We have taken this case to court not only because we firmly believe that these duties are unjustified but also because it is clear to us that the European Commission is ignoring the basic economic realities of the footwear business," FESI president Horst Widmann said in a statement. The legal action has been filed with the EU's General Court, the bloc's court of first instance. The European Commission is the executive arm of the European Union. <>


Thailand: Apparel makers shift to service-oriented model - To fend off competition from Asian countries, Thai apparel manufacturers are shifting their focus towards service to lure global buyers to set up their regional headquarters in the country. "Thai manufacturers should explore investment opportunities both in Asia and outside the region, offering competitive costs and other facilities to pave the way for the establishment of Bangkok offices that focus only on trading," said Dej Pathanasethpong, president of the Thai Garment Manufacturers Association. "Malaysia and Singapore have moved ahead of Thailand by focusing on a service-provider strategy for the past 15 years. If Thailand does nothing, we will step backward and those two countries will seize lucrative market when the Asean Economic Community is completely formed by 2015," said Dej. He also warned that Thailand would face serious labour shortages in the next five years, as the region gears up to become a single market by 2015. The government should plan to develop more technicians, experts and designers. Dej said manufacturers should gear operations to cater to growth in major manufacturing and consumer nations like China, India and Japan. <>


WWW Calls Up Some Designs From the Past - Wolverine World Wide is looking to the past for design inspiration with the launch of 1883. Targeting a male audience, collection is named for the year the company launched. The series of work, casual and outdoor styles is based on the brand’s heritage looks updated with a modern twist. Included in the offering are speed-laced hikers and classic 6-inch work boots. Retailing from $135 to $235, the line is aimed at specialty stores. Delivery is slated for August.. Hush Puppies, also under the Wolverine World Wide umbrella, is in a retro mood too with the debut of Nineteen Fifty-Eight, a collection of men’s and women’s looks based on styles from the brand’s launch in 1958. The collection, based on patterns in the Hush Puppies design vault, include suede oxfords for men such as the Yesteryear, inspired by the label’s legendary Wayne style; and the Attic for women, a peep-toe wedge. Set to retail for $90 to $100 for women’s and $110 to $120 for men’s, Nineteen Fifty-Eight is aimed at independents and premium apparel and department stores. Delivery is slated for June/July. <>


Sportswear Company Ventures into Footwear - Men’s ready-to-wear line Copy, a sportswear collection with a street vibe, is venturing into footwear for fall with a collection of athletic-inspired looks. Part vintage, part futuristic, the line includes the Studio, a low-top design; and the Elevate, a high-top sneaker. Color and material are a big part of the story, with suedes and patents in black and white playing against a palette of purple, slate blue and yellow. The line will be distributed in department and specialty stores including American Rag and Urban Outfitters. Delivery is set for July, priced at $75 to $150 retail. <>


Weyco Brand Nunn Bush Pushes Rugged Trend - Nunn Bush, part of Weyco Group, is heading for the great outdoors with its All-Terrain Comfort collection for men. The series of rugged-inspired casuals are engineered for light hiking and trail walking and include slip-ons, lace-ups and boots built on a flexible strobel construction and feature gel in the heels for enhanced cushioning. For protection against the elements, the shoes have a Scotchgard finish. The collection is targeted to outdoor specialty and comfort stores, at $80 to $90 retail. Delivery is set for August. <>


Women's Footwear Trend: Fringe Embellishments - Women’s brands have turned to fringe embellishments on boots, moccasins and sandals for fall ’10. An added fringe benefit: Several brands have opted to offer the look under the $100 mark. <>

R3: FINL: Ahead of The Pack - Shoe Trend Image



WTO Examining India's Export Subsidy Qualification - An evaluation by the World Trade Organization, following a request by the U.S., has determined that some Indian textile and apparel products may no longer qualify for export subsidies because they meet competitiveness criteria. While most government export subsidies are prohibited under WTO rules, there are exceptions that allow the world’s poorest nations and some developing countries, including India, to use such financial supports if they meet certain conditions. But the same criteria stipulate that developing nations such as India can no longer benefit from the exemption from the subsidy prohibition if they have reached export competitiveness in a product. This would occur if exports of a product have reached a 3.25% share of world trade for two consecutive years and would subsequently require India to gradually phase out any export subsidies on such products over a period of eight years. Products found to have met the threshold include woven cotton fabrics, woven fabric of synthetic yarn, men’s and boys’ knitted or crocheted shirts, women’s and girls’ blouses and shirts, T-shirts and vests, and women’s and girls suits, ensembles, jackets, blazers, dresses, skirts, panties, slips, petticoats, briefs, nightdresses and bathrobes. <>


Avon Acquires Liz Earle Beauty Co. - Avon Products Inc. has acquired Liz Earle Beauty Co., which manufactures the Liz Earle Naturally Active Skincare brand. The acquisition moves the Avon company into more channels, including television shopping and a limited network of retail stores. The purchase of Liz Earle might not have a large financial impact for the $10 billion direct-selling giant, but it has significant implications. Avon is opening its mind to other avenues, including new geographies and pricing. The company named acquisitions as its first priority over the existing share repurchasing program. The last brand Avon acquired was Discovery Toys in 1997, which it later sold. <>


SHOO Stock Split - Steven Madden Ltd. said Thursday its board has declared a three-for-two stock split, in the form of a dividend. The split will give all shareholders as of April 20 one additional share of Steven Madden common stock for every two shares held. The additional shares are expected to be distributed by April 30. As a result, the firm will have 27.5 million shares outstanding, versus 18.3 million before the split. The firm last purchased 2.6 mm shares of its stock, or nearly 13% of shares outstanding at the time, for $44.2 million, or $17 each, in March 2008. <>


Hat World Rebranding - Hat World, Inc., a subsidiary of Genesco Inc., plans a re-branding campaign designed to leverage its LIDS retail brand across the three major divisions of its business. The move includes renaming its Sports Fan-Attic and Impact Sports businesses. <>


Sports Logo Apparel Market - Adult Americans spent more than $8 bn on sports logo apparel in 2009, according to a new study being released by the National Sporting Goods Association (NSGA). “Sports Logo Apparel Market 2010,” based on a consumer study of 20,000 U.S. households, counts Americans 16 years of age and older as adults. Men were bigger spenders than women. Of the $8.02 bn spent, males accounted for 60.9% of all purchases. Females accounted for the balance, 39.1%.

“Sports logo apparel has been an important part of the product mix for full-line and specialty sports retailers for more than two decades,” NSGA Vice President of Information and Research Thomas B. Doyle said. Regionally, for the 14 sports activities, sports fans in the South accounted for the highest percentage of dollar purchases, 34.9%. <>


Saks High-Yield Bonds Soar as Consumers Revive Spending on Luxury Products - Saks Inc. and Neiman Marcus Group Inc.’s high-yield, high-risk debt is soaring as demand for luxury goods in the U.S. returns following the worst economic recession since the 1930s. <>


Zale U.S. Jewelry Chain's List of Bidders Said to Include TPG, Sun Capital - TPG, the private-equity firm run by David Bonderman and James Coulter, and Sun Capital Partners Inc. are among a smaller pool of bidders for a stake in Zale Corp., three people familiar with the negotiations said. <>


Petco boosts average order values with segmented e-mail campaigns - After switching to an e-mail marketing program that supports segmented newsletters based on customers’ interests, the multichannel pet supplies retailer boosted online average order values by 30%, e-mail marketing manager Margaux Abaya says. <>


Company Reported in Last 24 Hours: LULU, GIII, APP, WTSLA, FINL, BKRS 


R3: FINL: Ahead of The Pack - 1


R3: FINL: Ahead of The Pack - 2


R3: FINL: Ahead of The Pack - 3


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