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Two weeks ago we highlighted three incremental positive datapoints for the housing market: (1) California's $10k homebuyer tax credit, (2) Bank of America's plan to roll out principal forgiveness on a limited basis, and (3) the White House's renewed plan to combat foreclosures under new HAMP initiatives. Today, we are highlighting a few additional positive datapoints, combined with a word of caution in looking ahead.


First, yesterday's February pending home sales report was decidedly positive. Remember, pending home sales are a better leading indicator than existing home sales. While both measures are released with roughly a one month lag, existing home sales reflect contract closings, which reflect activity from 1-2 months prior. In other words, February existing home sales reflect buying activity from December/January. In contrast, February pending home sales, which was released yesterday, reflect contracts being signed, which will close in one to two months. In this respect, pending home sales lead existing home sales by approximately 1.5 months, which is why this is where the focus should be. The February pending home sales index rose to 97.6 from 90.2 in January, a month-over-month increase of 8.2% and an increase of 17.3% from the prior year. The following chart demonstrates.




Some context is necessary here. When the original homebuyer tax credit was set to expire on November 30, 2009 it pulled forward significant pending home sales volume into September and October. As the following chart shows, September volume rose 18.6% yoy while October was up 29.8% yoy. November then dropped to a yoy rate of 16.7% (down 13.7% mom) and went on to drop further in the months of December and January. Remember, all this data is seasonally adjusted, so winter vs summer should be irrelevant. From a timing standpoint, we think February corresponds with September (i.e. both 2 months prior to the tax credit expiration, and March will correspond with October (one month prior). We expect to see a significant uptick in March sales once the data comes out a month from now. Between now and then we wouldn't be surprised, and in fact would expect,  to see the broad-based housing-related credit tailwinds persist.




Second, HUD announced that it is changing its definition of foreclosure to now include loans that are 60 days delinquent. This will enable HUD to more aggressively deploy funds under its Neighborhood Stabilization Program, which require that homebuyers seeking grants use that grant money only for "foreclosed" homes. The program has disbursed some ~$6 billion to date, and it is expected that this number could increase materially with the new definitional change that will allow buyers to step in earlier than they otherwise would be able to. The White House has been using the housing-related government agencies (HUD, FHA, Ginnie Mae) and quasi-government agencies (Fannie Mae, Freddie Mac) to shoulder much of the heavy lifting in repairing the housing market, separately, and in addition to, Congressionally legislated initiatives such as HAMP and HAFA. We think the move by HUD represents yet another step in this direction.



While these datapoints are undeniably positive for the housing market, we remain skeptical of investors' exuberance around the recovery in the housing market for three reasons.


First, after the March pull-forward of activity ahead of the tax credit expiration on April 30, 2010 has passed, we expect to see a significant fall-off in buying activity just as we saw in the late Fall following the November 30 expiration.


Second, mortgage rates are rising. 30-year conventional rates are up 25 bps in the last few weeks. This is principally due to the 40 bps backup in 10-year treasury rate, and we expect the 10-year to continue to rise over the next year, and mortgage rates to rise with it. We expect additional pressure on mortgage rates to come from the Fed's exit from the Agency MBS purchase program last week. While it's unclear whether this will pressure mortgage rates directly through reduced Agency MBS purchasing, or indirectly through reduced Treasury purchasing (which drives Treasury rates higher in turn pushing mortgage rates higher), we think its clear that the end of the Fed's program will adversely effect mortgage rates. Further, once Fannie and Freddie complete their $200 billion repurchase program in a few months, we think that could add further pressure to the market, pushing rates higher. We've published in the past the significant sensitivities of buyer's purchasing power to even small changes in mortgage rates. We think this will be an overhang as we move further into 2010.


The third risk we're highlighting this morning is the official rollout of the HAFA program yesterday. The HAFA program is the Home Affordable Foreclosure Alternative program. For those borrowers who don't qualify for a HAMP loan modification, they may qualify for assistance under the HAFA program, which provides incentives to servicers to allow short sales and deeds-in-lieu (DIL) of foreclosure. While this may ultimately be preferential to the alternative of foreclosure for both the lender (or asset-backed investor), the reality is that foreclosure volume has been held back from hitting the market for some time now through a combination of HAMP, lender modification programs, state moratoriums around foreclosure and various other incentives lenders have to kick the foreclosure can down the road. HAFA may provide a significant boost to an already bloated unsold inventory of housing stock. Remember, HAFA has been in place for several months, but hadn't yet gone effective until yesterday meaning that servicers have already built up pipelines of eligible HAFA borrowers - many of whom are in the system already, paperwork complete, because they applied, but didn't qualify for HAMP. This inventory should hit the market in the next few months as HAFA ramps up, right at the time when we envision both natural demand diminishing because of the pull-forward and mortgage rates rising.


The key to this call is understanding the duration differences. To reiterate, we expect that in the near-to-intermediate term (1-3 months) the data will get better before it then gets worse over the intermediate-to-long term. Along these lines, we would expect the trends and the rally to continue as long as housing is improving. However, once we move beyond the near-to-intermediate term, we see the headwinds starting to pile up.


We have been working for the last several weeks on a robust housing industry model to try and make more quantifiable sense of these moving pieces, and until the model is complete we consider our conclusions preliminary. That said, we do see a number of potential cross currents, if not outright headwinds, converging around housing in the not too distant future. The question is whether they will be more or less powerful than the onslaught of new government and private sector initiatives to combat the housing crisis.


Joshua Steiner, CFA

Hedgeye Book Club: The Genius in All of Us by David Shenk

Talent is not a thing; it's a process.

-David Shenk, 2010


On Wednesday, March 31st, Keith interviewed Richard Peterson as a guest host for Bloomberg's taking stock. Peterson, the author of Keith's favorite book on investing - Inside the Investor's Brain - went back and forth with Keith in a rigorous and lively discussion about behavioral finance. In that discussion, Keith explained to Peterson how he likes to work key takeaways from various readings into his own investment process  -  always open to new information and evolving intellectually.


Such has become the culture here at Hedgeye. A few weeks back (Mar. 10th), my colleague Daryl Jones wrote one of our most popular notes YTD. The note titled, What Are You Reading, highlighted the current favorite book recommendations of various members of the Hedgeye team. In taking that one step further, we've decided to open our library and share with you any new and old required reading with the intent to deliver keen reviews and detailed synopses of the content. We hope you will find these valuable in your quest to evolve your own investment process.


So without further a due, here's our first shot:


In one of the most comprehensive books I've read in my young life, David Shenk's The Genius in All of Us : Why Everything You've Been Told About Genetics, Talent, and IQ Is Wrong completely hammers home the fundamental notion that greatness, superior talent, high achievement, and sheer excellence are not at all the result of natural gifts bestowed upon us by our genetic code. Rather, it is the sum of hard work, perseverance, and a confluence of genetic and environmental interaction - which Shenk aptly titles "GxE" (genes multiplied by environmental factors). Using one of the most voracious research processes I've seen (sorry Keith), he masterfully pores thorough just about all the required reading on the subject in order to dispel the old, tired way of thinking about cognitive, social, and athletic development: "G+E" (genes plus environmental factors). Not only does he accomplish this, he takes it a step further in using more cutting edge research to suggest the best methods for "cultivating greatness" - as he puts it. It is our pleasure to walk you though some of the key takeaways from the book an how you can use them to cultivate greatness within your own investment process.


In the first part of the book titled, "The Myth of Gifts", Shenk explains how groupthink within the scientific community and the media has successfully kept alive the "simpler and more alluring idea of giftedness", one where individual characteristics and achievement levels are more likely the product of genetic inputs, rather than the result of a confluence of factors - many of which we (and our parents) have control over (Shenk 49). In the introduction, Shenk does a great job of using anecdotal evidence about Ted William's masterful skill at baseball to introduce us to one of his main conclusions - "talent is not a thing: it's a process" (Shenk 8). Shenk remarks, "[Ted Williams] sought out the great hitters of the game - Hornsby, Cobb, and others - and grilled them about their techniques" (Shenk 7). In this business, no one is right 100% of the time. Heck, you can make a killing even if you're right less than half of the time. At Hedgeye, we've been right on our trading calls within our virtual portfolio roughly 85% of the time. Rather than rest on our laurels, we're up grinding well before the crack of dawn each day in order to try to capture that remaining 15% - and were not afraid to consult some of the best to do so (see Keith's Feb. 3rd exchange with David Einhorn of Greenlight Capital or any of his recent appearances as host of Bloomberg's Taking Stock).


That brings me to Shenk's next major point: "high… achievers are not necessarily born 'smarter' than others, but [rather they] work harder and develop more self-discipline" (Shenk 42). If you've ready any of our work, by now you're familiar with our love affair with processes over here at Hedgeye Risk Management. Every morning, every member of our team has their feet on the floor, flushing though hordes of macro and industry-specific data to deliver the best research we can possibly put out. My high school offensive line coach used to say, "talent doesn't win when talent doesn't work hard". Shenk goes one step further in suggesting that talent doesn't even become talented without many thousands of hours of deliberate practice.  Furthermore, Shenk uses the latest scientific advancements to debunk similar "born with it" myths about Kenyan runners:


"These are not super humans with rare super genes. They are participants in a culture of the extreme, willing to devote more, to ache more, and to risk more in order to do better. Most of us will understandably want nothing to do with that culture..." (Shenk 89)


Our processes don't change day-to-day, no matter how much attention the manic media can sometimes pour into one story (see: iPad). We gather it all the relevant data, analyze it with dozens of years of industry experience, and crank out the content. Then we rinse and repeat. There is no secret Hedgeye sauce. The secret sauce might be that we don't really have a secret sauce. We just grind. Shenk aptly suggests that becoming great "requires enormous, life-altering amounts of time - a daily grinding commitment to become better" (Shenk 55). At Hedgeye, we substitute "become great" for "managing risk and delivering absolute returns for our subscribers".


The second part of Shenk's book walks the reader though a multitude of scientific discoveries and how these findings can be used to form successful ways to "Cultivate Greatness". Shenk flat out says to the reader:


"The only way to [become great] is to go farther, harder, longer than almost everyone else, to push well past the point of login or reason. If it looked easy or even attainable to most, then many more would get there." (Shenk 100)


Plain and simple: there are no shortcuts on the path to remarkable achievement, according to Shenk. Those that are willing to make the long journey must have already developed the understanding that "the big prize is appreciated as a far off goal… not lusted after… [and] small accomplishments along the way provide more than enough satisfaction to continue (Shenk 101). In investing, particularly risk management, the best players are those that relish in the small accomplishments along the way. Too often investors get run over chasing tops, shorting lows, and constantly looking for the next big idea. Unfortunately, the next big idea is the next big idea for a reason. Big, career-making calls are not always around the corner. Most of the time, this job requires that you have to be satisfied with not losing your clients money and capturing the most alpha by strategically managing risk around all of your positions.


As Shenk puts it, "an emphasis on instant gratification makes for bad habits and no effective long-term plan" (113). Ask any baseball player if swinging for the fences is the best approach to driving in runs. Even the littlest of little-leaguers will tell you that "just getting on base" is how teams win ballgames. Moreover, Shenk uses additional scientific justification to suggest that building a winning culture requires that teams "set high expectations, but also show compassion, creativity, and patience" (Shenk 123). Patience, sometimes can sometimes be the most important factor in delivering absolute returns to your clients. Too often investors suffer from duration mismatch because they are too early on their trading calls. As Keith learned form trial in error throughout his years managing hedge funds (and I from him in a few weeks), being early equals being wrong. Furthermore, managing risk requires you know when and at what price to get into each of your positions - no matter how sweet the fundamentals look on the long or short side.


In short (note the irony - sorry for the lengthy note), we hope you'll find this piece as additive to your investment process as it has been and will continue to be for us. Be on the lookout for more notes of this nature, as we are planning to open up to you our process for intellectual fulfillment and investment evolution. As stated before, the best performers in any arena are the ones who willing to adapt and evolve. Scientific study has proven that true for animals, humans, athletes, investors, and everything in between.


As the facts change, so do we. Wash. Rinse. Repeat. That's risk management.


Darius Dale


The Hope Chart: SP500 Levels, Refreshed

Hope, when combined with fear, can be amazing to watch – particularly when it’s being priced on a market tick.


I walked through the following TRADE, TREND and TAIL lines of support in this morning’s EL:

  1. TRADE (3 weeks or less) = 1174
  2. TREND (3 months or more) = 1124
  3. TAIL (3 years or less) = 1039

From a risk management perspective, protecting against immediate term hope and fear is really not that complicated. We have made these overbought/oversold calls on the SP500 since we started the firm. They are tactical in nature and more about realizing where your risk/reward is from a time and price than anything else.


From our updated immediate term sell line (as of 11AM EST) we have outlined below at 1189, downside to our most immediate term level of TRADE line support is -1.3%.  Downside to the TREND and TAIL lines are -5.5% and -12.6% respectively.


While we haven’t had many down days in the SP500 that are more than 1% since the February Freakout, this chart outlines the hope that that day isn’t closer today than it was yesterday.


Hope is not an investment process.



Keith R. McCullough
Chief Executive Officer


The Hope Chart: SP500 Levels, Refreshed - S P

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R3: Ominous Signs from Sports Authority



April 6, 2010


Sports Authority is accelerating square footage growth, in another step to dress the pig in lipstick for a 2H IPO. Good for most of the supply chain, incl NKE, UA, COLM, KSWS and even FL, DKS and HIBB. The problem is that we’d argue that TSA need not exist. Another ‘brilliant idea’ until it proves to be a disaster.





We think the most notable recent nugget out of retail is that The Sports Authority noted it is looking to step up expansion in 2011/2012 with the opening of approximately 35 units each year. The company also noted it is stepping up its store remodel efforts as well as its marketing and advertising messages. TRANSLATION = TSA is dressing itself up for an IPO. Accelerating unit growth, better product/comp cycle, leveraging fixed costs for the first in 3+ years. Sound familiar? Yes, Dollar General.  Do we really NEED more Sports Authority’s? Only to the magnitude that we needed Linens ‘N Things and Circuit City. But the reality is that this will help Nike, Under Armour, Columbia, North Face (VFC) and most other brands that sell into this channel. It also helps the competition in that a better cycle eases up on the need for incumbents (DKS, FL, etc…) to get aggressive on price. Ultimately, this will sound like a really good idea until we all wake up one day and it will prove to be disaster.


Other Details…

  • Store growth slowed to 9 store openings over 2008 and 2009. By 2011 expansion rate is expected to reach the 35 stores a year target which last occurred in 2007.
  • Expansion will be focused in the Northeast and Midwest (Ohio Valley) with both mall and strip center locations.
  • Texas market will get ‘special attention’ because TSA is locked in a tight battle with Dick's and Academy.
  • Merchandise mix changing to accommodate more fitness at the expense of outdoor.
  • TSA is teaming up more with New Balance to incorporate more activewear and the new NB toning shoes.

 R3: Ominous Signs from Sports Authority - TSA image





  • Add New Balance to the list of athletic footwear manufacturers to introduce a “toning” shoe. The latest entry called the “Rock & Tone” aims to mimic other “rocker” shoes, but with a lower profile sole and a lighter weight. Additionally, New Balance is planning to follow up with the launch of a “balance-board” shoe, called truebalance. This show will be actually be launched in July at upscale retailer, Fred Segal. Looks like New Balance is hoping to get a jumpstart on the LA scene with this one…


  • Add social media and blogging to the list of tools Ann Taylor is employing in an attempt to revitalize its LOFT brand and get in touch with a younger, style conscious customer. The company recently launched “live. love. Loft.”, a blog that essentially reads like a fashion mag with product placement. Lots of LOFT product mixed with beauty, travel, food, home and health tips. With the publishing world in disarray maybe retailers will start hiring their own staff to publish content?


  • New York-based Le Tigre, the popular American apparel brand of the 1980’s purchased by KCP in 2007, is creating a buzz with its timely billboard campaign on the West Side Highway sporting the tagline “Golf’s original Tiger. For those who play a round.” Don’t be surprised to see polos with the tiger signature among the crowds at Augusta this week as fans choosing not to support Team Tiger now have a more discrete way to protest his return.





 R3: Ominous Signs from Sports Authority - Calendar





The Democratization of Fashion - As crowdsourcing continues to gain force, consumers are having their say about specific designs and being compensated for them monetarily, with prizes, discounts or other recognition. The trend is huge in Holland, San Francisco, New York and Chicago. Crowdsourcing is largely underused in the apparel industry. Threadless.com, FashionStake.com, and Made.com utilize this tactic. Threadless.com lets consumers decide which designs it produces in graphic T-shirts. And when FashionStake.com bows this fall, shoppers will be able to offer their two cents about collections and buy stakes in designer collections that will lead to discounts, freebies and fashion show invitations. Launched last week, Made.com, a London-based designer furniture site that only produces what consumers vote for and sells directly to them, is already looking into expanding the concept to clothing. By relying solely on crowdsourcing for its assortment, the site reduces the odds of having unsold inventory, eliminates the middleman altogether and offers voters discounts should they choose to actually buy the furniture. <wwd.com/business-news>


Home Depot's Blake Adds Jobs for First Time in Four Years on Sales Rebound - Home Depot Inc., the largest U.S. home-improvement retailer, is adding store jobs for the first time in four years in anticipation of a rebound in sales. <bloomberg.com/news>


Tory Plans Do Not Include a VAT Increase - The Conservative Party has insisted that it would not need to increase VAT in order to cut the deficit if it forms the next Government as Prime Minister Gorgon Brown is today expected to confirm that the next general election will be held on May 6. <drapersonline.com>


Spain Retail Tough in Downturn - Sales in Spain’s fashion industry slid 8% last year from 2008 to 18.3 bn euros in 2009. A 19% jobless rate has left 4.1 mm unemployed; GDP fell by 3.6% last year, the steepest drop in decades, and the deficit is a whopping 11.4% of GDP. Key to the sector’s revitalization is an immediate boost in consumer demand, greater globalization and a more viable made-in-Spain image, especially in foreign markets. The biannual apparel fair has taken a hit in recent editions, losing roughly 50% of its vendors. <wwd.com/retail-news>


Crocs Feel the Love Campaign - Crocs is on a mission to show consumers the "soul" and "foot-loving sole" of its shoes. The brand debuted a new campaign on March 29 centered on a single message of "Feel the Love," and it focuses on a proprietary technology called Croslite, which is built into every Crocs shoe. The campaign, created by the band's new lead agency Cramer-Krasselt/Chicago, is now rolling out in the U.S. and Europe. It spans TV and print (books such as Real Simple and InStyle), out-of-home, POP, and includes a major social media/digital component. <brandweek.com>


K-Swiss Enters a Sponsorship and Endorsement Deal - K-Swiss has entered into a sponsorship deal with Home Team Marketing to put its name in about 100 high schools in the Dallas, Houston, Los Angeles and Pittsburgh markets. K-Swiss indicated the list could grow to 1,000 in 2011 if successful. K-Swiss announced a global endorsement deal with "Biggest Loser" trainer and coach Jillian Michaels. She will represent K-Swiss and participate in interactive retail and consumer-facing programs throughout the year. In the future, Michaels will develop collaborative product line with K-Swiss. <sportsonesource.com>


Hugo Boss's Revamped E-Commerce - Hugo Boss opens its redone e-commerce site in the US today. It is part of a major worldwide initiative by the German luxury brand to update its Internet presence. The U.S. site will be on a new platform with entirely new design, navigation and functionality compared with the e-commerce sites running in Europe, which will eventually also relaunch on the new platform. The company’s efforts will turn to Asia next year. Chief executive officer Claus-Dietrich Lahrs predicted in November that Hugo Boss would sell more than 50 mm euros of goods online within two years, up from about 10 mm euros. <wwd.com/retail-news>


The Men’s Wearhouse Expands Prom Rep Program - Launched last year, the program offers teens 10% off their tuxedo rentals for every friend who rents at the Men’s Wearhouse. Ten referrals translates into a free tux. Female prom reps who earn a free tux rental can either transfer it to a friend or opt for a $100 Visa gift card. In 2009, participants had to visit a store to take advantage of the program, but this year, the company has instituted more social and online tools.<wwd.com/retail-news>


Wal-Mart Loses Fashion Driver from the Board - Allen Questrom is saying goodbye to Wal-Mart Stores Inc. After three years on the retailer’s board of directors, Questrom has decided to not seek reelection. Questrom saw little chance remaining to influence the company, though his expertise in apparel retailing and overhauling store presentations could come in handy considering Wal-Mart has a strong reputation for offering the lowest prices, but has limited fashion appeal. Two years ago, the giant discounter beefed up its New York apparel office in an attempt to stay on top of trends and elevate its apparel. Questrom was chairman and chief executive officer of JCP, Macy’s and Barneys New York. <wwd.com/retail-news>



Having indulged in all of the vices of the “boom years”, Ireland is now in more familiar territory.


“The public are entitled to have an absolute guarantee of the financial probity and integrity of their elected representatives, their officials and above all Ministers.  They need to know that they are under financial obligation to nobody.”

-Bertie Ahern, member of the opposition, Dáil Éireann transcript, December 1996


Taken in light of all that has transpired in Ireland since 1996, I believe that the above quote perfectly captures the essence of Keith’s mantra, “Numbers don’t lie; politicians do”.  In 1997, Mr. Ahern was elected Taoiseach, or Prime Minister, largely due to his man-of-the-people image that earned the public’s trust.  Suffice to say, he is not held in the same esteem today.  From 1997, his government was credited with creating the “Celtic Tiger” and he held power for over a decade before resigning in 2008.  Given the current state of affairs, and the obligations that the Irish people are now under, the phrase “Celtic Tiger” is almost embarrassing to recall.  The issues facing Ireland are similar to those facing the U.S.  Elevated debt, personal and private, loom over future generations and political leadership, not fear-mongering, is desperately needed. 


In the last decade, Ireland’s close-knit power circles worked closely to keep the good times rolling.  In 2006, Bertie Ahern astonishingly declared that the “boom times are getting boomier”.  In 2007, he was reelected.  In early 2008, Leader of the Senate and “property investor” Donie Cassidy said the following, “I will remind the House, perhaps in 12 or 18 months, when prices have again increased by 25% or 30%, that they were told this by the Leader of the House.”  Irish leaders and businessmen grew increasingly vocal, and spoke with more and more certainty, on housing and the economy as warning signs mounted.  The bubble in the property-fueled Irish economy had the three signature characteristics, as discussed by Richard Peterson and Keith on Bloomberg TV last week.  It was a great story, it was not going to end, and prices kept confirming that it was a great story that was never going to end.


Of course, everyone had a stake in keeping the party alive and there is now a massive price to pay.  The fiscal deficit of Ireland stands at 11.7% of GDP.  With the national debt ballooning and the International Monetary Fund “monitoring” Ireland’s situation, many have been calling for a right-sizing of the bloated public sector in Ireland.  While politically frail, the current government has taken some small steps in addressing that issue.  Despite the importance of the public sector cutbacks to date, the cuts amount to a mere €4 billion in savings.  To run the country day-to-day, the government is currently borrowing €20 billion per annum.  The numbers don’t add up.


Anglo Irish Bank is the bank most synonymous with the property bubble and enjoys close ties with the ruling political party, Fianna Fáil.  When the government first moved to insure the liabilities of the six major Irish institutions in 2008, Anglo was to receive €4 billion. Currently it is expected that the cost of bailing the bank out may amount to €22 billion (this will almost certainly increase).  For context, Ireland’s 2009 Gross Domestic Product is estimated to be $177 billion, or €131 billion.  It’s not only banks that are being allowed to redistribute losses.  According to The Irish Independent, Sean Quinn - then Ireland’s richest man - had amassed a €2.7 billion exposure to Anglo over two years.  His losses on that investment now are estimated to be €3 billion.  The government and Anglo struck a “share placement” deal to reduce the bank’s exposure to the entrepreneur.


Exactly how burdened the taxpayer will be due to the government’s National Asset Management Agency (NAMA) taking on toxic property loans from financial institutions is unclear.  The book value of loans acquired form Anglo Irish Bank is estimated by NAMA to be €10 billion.  While some are speculating that the bailout for Anglo alone could cost each taxpayer €22,000, as yet it is uncertain exactly what value the securities will be assigned.


Ireland’s primary trade partner is the U.K. and the Euro is currently trading at £0.88.  As a result, Ireland’s economy is far less competitive; for much of the last decade the Euro traded in a range from £0.55 to £0.70.  Furthermore, with free movement of people and goods between the Republic of Ireland and Northern Ireland, small businesses have been adversely affected by consumers taking advantage of the “cheap” Pound in Northern Ireland.




With the cumulative debt on Irish mortgages having grown at three times the annual rate in the euro zone between 2004 and 2008, the subsequent crash has left many homeowners in negative equity.  Egged on by politicians and “experts”, many paid prices that were “bottoming out” in 2006.  According to the TSB/ERSI House Price Index, house prices have declined 31.5% from their February 2007 peak.  As prices continued to slide, politicians and media personalities only firmed in their convictions that prices would “never be cheaper” again.  With private debt servicing at elevated levels (chart below), Irish consumers face significant interest rate risk should the ECB decide to raise interest rates.


CELTIC CRONYISM - consumer debt interest irl


The impact of public and private debt being saddled on the Irish for generations to come is clear to see in the data.  Following years of immigration, the familiar flow of emigration has returned.  In 2009, 93% of Irish emigrants were under the age of 44, according to the Central Statistics Office.  These people are valuable; 61% of the total Irish population have attained a third-level degree (I suspect that this is skewed towards the younger cohorts of the population). 


CELTIC CRONYISM - emigration ireland


This chart paints a depressing picture for Ireland’s future.  During previous waves of emigration in the 19th and 20th centuries, there were countries with fairly lax immigration policies that Irish people quickly took advantage of.  Despite popular destinations such as the United States, Canada, Australia, and New Zealand now carefully limiting the number of immigrants coming through their borders, it is telling that the number of emigrants from Ireland has increased so steeply.  While the politicians bicker, people are voting with their feet.


Many commentators are gaining optimism following a marginally positive comment from Moody’s last week.  The agency downplayed the role of debt in Ireland’s future, instead emphasizing the prospects for economic growth as being of primary importance.  The agency also decried that NAMA is an “ingenious mechanism”.  Perhaps they are correct; that is certainly what I want to believe.   However, the statement from Moody’s reminds me of a passage I read recently on Wittgenstein’s ruler, “Unless you have confidence in the ruler’s reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler”.  The less credible a source, the more a statement from that source will be about itself rather than the object of its statement.  At Hedgeye, that sums up how we feel about compromised ratings agencies.  For many Irish people, it also captures how they feel about the vast majority of Irish politicians and their lack of ability or inclination to resolve the country’s dilemmas.


Rory Green


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