U.S. Treasury Debt... Wouldn't Touch It With a Ten Foot Pole

Conclusion: Analyzing the latest quarterly presentation of the Treasury Borrowing Advisory Committee leads to some pretty negative takeaways as it relates to the fiscal health of the U.S.


Position: Short the U.S. dollar (UUP); Short 1-3 year U.S. Treasuries (SHY)


Below is a collection of select charts we pulled from the Department of the Treasury’s latest quarterly presentation to the Treasury Borrowing Advisory Committee. Needless to say, all is not well in our Hedgeyes, which is evident in the analysis below. We continue to remain short the short end of the yield curve and the U.S. dollar to express our bearish conviction regarding the U.S. government’s fiscal health and the negative long term economic outlook domestically.


After having tax revenues trending well below the historical recovery average since the end of the recession, we’ve finally eclipsed the average four quarters into the recovery. Unfortunately, that’s comes just as the Bush tax cuts may be extended while employment is deteriorating and both consumer spending and housing appear to exhibit significant downside over the next 3-4 quarters.


 U.S. Treasury Debt... Wouldn't Touch It With a Ten Foot Pole - 1


Much of the growth in tax revenue have been driven by corporate tax receipts, which look to slow absent an effective tax hike in the upcoming period of slow growth and depressed top line growth. Many companies have been pulling margins levers to drive earnings growth in recent quarters so a tax hike could be disastrous for earnings going forward, as these companies don’t have much left to cut.


 U.S. Treasury Debt... Wouldn't Touch It With a Ten Foot Pole - 2


If the federal government eats the marginal loss in revenues, they will need to borrow more to fund a larger deficit on the margin. Based on the deficit projections from our Hedgeye models, their estimates for borrowing (i.e. Piling Debt Upon Debt) over the next two years are far too low.


 U.S. Treasury Debt... Wouldn't Touch It With a Ten Foot Pole - 3


With yields on the long end of the curve near historic lows, the average maturity of U.S. Treasury debt outstanding has continued to increase as the Treasury issues more long-dated paper. Currently, the average maturity is right at the 30-year average of 58 months, or 16 months above the 30-year minimum and 13 months below the 30-year maximum. Should this up-trend continue, U.S. Treasury holders in aggregate will be increasingly subject to further duration risk – which is noteworthy given the fiscal health of the country (see: PIIGS 2010).


 U.S. Treasury Debt... Wouldn't Touch It With a Ten Foot Pole - 4


The percentage of debt maturing in the near-term is at historic lows on a 20-year basis. Even still, roughly 31% of treasuries ($4.1 trillion) need to be refinanced in the next 12 months. Adding that with a consensus minimum of $950 billion in financing needs in FY11 leaves us with 38.2% of treasury debt needing to be financed in the next 16 months. Accounting for Hedgeye’s worst case scenario of $1.93 trillion in financing needs for FY11 takes the magic number up to 45.6%.  This occurs at a time when it will likely become more difficult for the United States to roll over short term debt due to burgeoning fiscal issues.


 U.S. Treasury Debt... Wouldn't Touch It With a Ten Foot Pole - 5


A chart that really jumped out to us was their interest expense projections. Under baseline OMB scenarios (which we have shown in our previous  work to assume above-trend growth and below-trend expenditures), the federal budget’s interest expense will jump to nearly 4% of GDP in just ten years – a near 275bps increase from today’s ratio of ~1.25%! This is not surprising given the upward direction of the average maturity of public debt outstanding. A domestic interest expense near 4% of GDP is well above the historic average for the previous 60 years and this rise will naturally present significant trouble for the fiscal health of the United States over the next decade – especially considering the current direction of entitlement and healthcare spending. Either taxes will have to ramp up significantly in the next 5-10 years or the U.S. will continue to have to Pile MORE Debt Upon Debt to fund its deficits. Either result is negative for future economic growth domestically.


 U.S. Treasury Debt... Wouldn't Touch It With a Ten Foot Pole - 6


The next chart highlights a pretty interesting conundrum the U.S. federal government is in regarding the direction of interest expenses. When compared to many of its Western European and Japanese counterparts, we see the weighted average maturity of U.S. Treasury debt outstanding is below the group average. This means that the Department of the Treasury has room to take advantage of depressed yields at the long end of the curve and issue more long-dated securities, further increasing the interest rate burden on the federal government P&L.  Should the U.S. remain a group laggard and/or reduce its average maturity profile, it will leave itself more exposed to market sentiment and a potential crisis of confidence in U.S. Treasury debt. China has been selling U.S. Treasuries and should any other major holder (i.e. Japan, U.S. commercial banks, U.S. pension and hedge funds, etc.) follow suit, the U.S. government could potentially face a substantial refinancing crisis if rates on the short end of the curve back up meaningfully.


 U.S. Treasury Debt... Wouldn't Touch It With a Ten Foot Pole - 7


The last chart we want to highlight shows U.S. Treasury issuance will continue to dominate the debt supply landscape over the next couple of years, further crowding out private sector investment. Not much else to say here other than the fact that we are likely to face below trend GDP growth from a lack of private investment as long as the grey bar continues to dominate the chart below.


 U.S. Treasury Debt... Wouldn't Touch It With a Ten Foot Pole - 8


All told, we continue to remain short the short end of the yield curve and the U.S. dollar to express our bearish conviction regarding the U.S. government’s fiscal health and the negative long term economic outlook. The federal government’s aggressive baseline projections highlight some pretty negative trends and the more conservative Hedgeye models suggest even more downside as it relates to the intermediate-to-long-term fiscal heath of the U.S.


Darius Dale


Keeping the Same Store Sales Score

August was better month than expected for those keeping the same store sales score.  The reality of the underlying results however, is that demand doesn’t really appear to be changing, better or worse.  There are a couple of key takeaways to be mindful of.  Across the board, when given a reason to shop, the consumer appears willing to spend.  This applies to August in a couple of ways. First, as it pertains to back-to-school and back-to-college.  Retailers across the board with exposure to this event cited on plan or better results so far in this key (but drawn out) selling season.  Is this enough to propel the quarter to upside on its own? No, but it clearly demonstrates the consumer still has the propensity to spend when given an  “event” or reason to do so.  Secondly, those retailers with improved or new products are seemingly able to drive sales as well.  Case in point is Limited Brands.  The company’s focus on new product introductions at Victoria’s Secret coupled with heavy marketing were key in driving above-plan and above-expectation results for the month.  Monthly innovation in the bra space is working, hands down.


Unfortunately, today’s results don’t really enhance clarity or visibility as we look out towards the remaining months of the year.  The back-to-school season, while off to a solid start, is also inherently volatile given the large amount of variables impacting mom’s decision to shop.  Here’s what we know.  In areas where school is already back or close to it, demand has been stronger.  Yes, this another sign of consumers buying close to need.  In states with tax-free events response has been strong.  Keep in mind that these events inherently create volatility and pull demand forward in some cases.  Promotional activity was frequently cited as “aggressive” or “high”, which should not come as a surprise, especially when it comes to teen apparel.  Regional trends are mixed, likely influenced by the timing of when kids return to school.  California and Florida (areas with the easiest compares) were mentioned positively by several retailers, although this is a trend that has been underway for several months now.  Finally, the weather was not a help this month.  Extreme heat has in some cases put a damper on early sell-through of Fall apparel.  It has also helped those that still have some Spring/Summer goods left (i.e. shorts, tees, and sandals).  For the most part, almost every retailer at this point is hoping for a cool-down.


Bottom line, when we look at our monthly same store sales index, it remains stuck in a sideways trend.  The 2-year monthly industry comp did tick up sequentially to 0.3% from -1.3% in July, but the range of monthly results still hovers around flat.  With earnings reports now complete, guidance reset, and expectations generally tempered, it’s no surprise that these results appear to be optically better than one would expect.  The reality is that underlying sequential demand remains essentially unchanged, at least if you’re using same store sales as a way to keep score.


Keeping the Same Store Sales Score - aug sales


Additional company callouts:

  • Hard to believe but AEO noted a strong response to key back-to-school categories including knit caps, denim, and sweaters.  Sounds like their customers must be stocking up or are completely oblivious to the heat.
  • ARO noted that stronger results were reported in peak back-to-school regions, mostly in the South and West.  As a result, management also expressed that it believes consumers are shopping closer to need.
  • Costco noted that TV sales remain under pressure, with both unit and sales comps declining by mid single digits for the category in August.  On the positive side, softlines were a big positive divergence for the month and increased by a mid-teens percentage.  Key drivers of this business were housewares, home furnishings, domestics, jewelry, and men’s apparel.  On the inflation front, average sales prices for meat were up mid single digits and produce was flat y/y.
  •  Gap noted that the company’s current Black Pants merchandising effort in women’s was a key performer in the month.  For men, khaki’s and woven shirts were top categories.  Baby and kid’s overall outperformed adults.
  • JC Penney noted that back-to-school sales performed well during the month, led by strong double digit increases in sales of backpacks.  Similar to other retailers, JCP also noted that sales were stronger in regions with earlier back-to-school start dates indicating purchases are being made closer to need.  While still early in its turnaround process, the home category was cited as having a positive performance online in the home category.  Recall that JCP’s online biz is about 50% home related.
  • Kohl’s noted consistency within its monthly results.  All regions and product categories produced positive increases for the month.  Home was the strongest category, increasing by high single digits.  The Southeast region also outperformed, increasing by double digits.  Kohl’s also showed a notable increase in transactions, which increased by low double digits.
  • Nordstrom highlighted jewelry, dresses, and women’s shoes as leading categories for the month.  August also marked the 12th month in a row of traffic increases for the department store retailer.
  • Ross Stores continues to highlight dresses, home, and shoes as leading categories for the off price retailer.  All three categories produced sales increases in the low double digit range. 
  • Limited noted that is has been and will continue to be less promotional than last year.  The company is eliminating a Fall sale even this year and continues to see substantial merchandise margin improvement as a result of less clearance and promotional activity.
  • Target noted continued strength in its food categories, registering an increase of low double digits for the month.  Other above-average categories included health and beauty, men’s apparel and women’s apparel- all of which increased by mid single digits.  Electronics were cited as a weaker category for the month (similar to prior months).

Eric Levine



Starbucks remains a well-run company but the stock is now flashing as immediate-term overbought in Keith’s model.  


Overbought TRADE and broken TREND (bullish TAIL). Refreshed range = $22.16 - $24.39


Despite the fact that SBUX continues to pursue additional avenues of growth and seems to have continued sales momentum, the timing of Keith’s overbought level being triggered is supported by the fact that the company will be lapping its most difficult top-line comp and year-over-year EBIT margin comparisons of fiscal 2010 in its current fiscal 4Q10.  For the past six quarters, the company has posted sequentially better comps on a one-year basis but I believe it is unlikely that the next reported quarter will continue that trend (reported +9% in 3Q10).  I would not be surprised, however, to see the company post another quarter of sequentially better trends on a two-year average basis (SBUX needs to report a +4% comp or better in the U.S. to maintain two-year average trends from the third quarter).  The company laps its first positive comp in the U.S. in 1Q11.


I think same-store sales and margin growth will continue to materialize in FY11 but the rate of growth will slow and the company’s ability to continue to surprise to the upside from both top-line and bottom-line perspectives will likely diminish as expectations have caught up with the company.  That being said, I think the stock still makes sense on a long-term basis as the company stands to benefit from continued leverage of its existing store base, international growth, its increased investment in marketing and its pursuit of additional platforms of growth (largely VIA and Seattle’s Best Coffee). 


It is worth noting that Keith shorted the S&P 500 today just after 11am.  As I wrote in a note to Hedgeye Macro clients on Tuesday, we believe that the August payroll number being released tomorrow will be a disappointment versus current expectations (of -100,000). 


SBUX: OVERBOUGHT - sbux levels92


Howard Penney

Managing Director

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EARLY LOOK: Loser's Assemble

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“Losers assemble in small groups and complain about the coaches and other players. Winners assemble as a team and find ways to win. "
-Bob Stoops


Bob Stoops, or Big Game Bob, as he is known in the collegiate football arena is the head coach of the Oklahoma Sooners. As head coach of Oklahoma, he’s coached one of college football’s storied programs through one of the most successful decades ever, going 179-29 from ’99 – ’09 and winning a national championship in 2000. That same year, he was awarded the Paul "Bear" Bryant Award for Head Coach of the Year, in addition to the 2000 and 2003 Walter Camp Coach of the Year awards.
Unfortunately, for him, he’s earned the moniker for what he has not accomplished on the field, rather than his prowess on the gridiron. After having won the title in 2000, he took three more Oklahoma teams to the BCS National Championship game (2003, 2004 and 2009) – losing each time and “earning” his sarcastic nickname.
As any good football coach will tell you, however, you must have a Short Memory to excel in the sport. Whether it’s a quarterback who throws an interception or a cornerback that gets beat deep, you’ve got to be able to shake it off and refocus on the task at hand. I myself gave up a few sacks earlier in my collegiate career on the blind side, but I never once dwelled on any negative play, always focused on my next assignment. I was, however, careful not to have Too Short a Memory, as I was determined never to get beat by the same move twice.
When it comes to fiscal and monetary policy in Japan and the U.S., there have been plenty of mistakes made throughout the past few decades (i.e. near zero interest rates fueling asset bubbles; Piling Debt Upon Debt; Fiat Foolery in Financial Markets, etc.). Those mistakes have led to balance sheet recessions, depressed economic growth, and increased volatility in financial markets.



EARLY LOOK: Loser's Assemble - chart1


Unfortunately for the citizenry of Japan and the U.S., the Fiat Fools in charge have memories that are either too long (U.S.) or too short (Japan). Take Japan for example – after two decades of below trend GDP growth which largely stemmed from Piling Debt Upon Debt, the Professional Bureaucrats there are fighting with one another to see who can offer the biggest stimulus and government intervention package. Two decades of lessons not learned…
In response to Prime Minister Naoto Kan’s recently-unveiled 920 billion yen stimulus program, Ichiro Ozawa kicked off his campaign to become Japan’s new prime minister (sixth since 2006) by pledging to “stop the rise in the yen by all means”, which includes intervention in the currency market. In addition, he also one-upped Kan by promising a 2 TRILLION yen stimulus program to attract voter support from those that think the government isn’t doing enough to spur the economy. Unfortunately, for him, the citizenry of Japan supports the more fiscally responsible Kan by a factor of 4:1 – a clear vote against even bigger government.
Having a long enough memory reminds us that despite over 100 TRILLION yen in stimulus spending from 1991-2000, Japan was still mired in below trend GDP during the decade (an average of 1.5% Y/Y vs. an average of 4.6% Y/Y during the 1980’s). The Bank of Japan’s quantitative easing program (March 2001 through March 2006) which took excess reserves on Bank Balance Sheets from $53B to $386B (+628%) and accelerated purchases of long term government bonds failed to spur the kind of credit expansion that one would expect with a already flat yield curve that compressed a further 63bps from the start of QE until the trough on 6/12/03. What happened, however, was investment as a % of GDP fell ~200bps from 1Q01 to 1Q04 and the bond bubble burst in mid-2003, which sent the 10-year JGB yield up 119bps in less than three months.
Fast forward to today, we see that in typical loser fashion, both Kan and Ozawa have assembled in their respective subgroups to complain – Kan whining about Ozawa’s connection to a funding scandal; Ozawa whining about Kan’s inability to do what is “necessary” to support the Japanese economy. Needless to say, we believe Japan is too short on memory and political wherewithal to “find a way to win”, and, as a result, we are short both its currency and equity market in our Hedgeye Virtual Portfolio.
Shifting gears to our side of the Pacific, we see a similar setup in Washington, where the mid-term elections have set the stage for an almost unbearable amount of finger pointing and whining amongst Democrats and Republicans alike. Much of it has to do with the expansionary monetary and fiscal policy coming from the Fed and the White House, where Helicopter Ben and his Über Long Memory has the Fed running plays not seen since the Great Depression.
The amount of finger-pointing in the last two weeks alone would derail any solid team’s championship hopes. Below are a few of the more notable ones:

  • Obama (8/17): “We have a choice between the policies that got us into this mess and the policies that are getting us out of this mess.”
  • House Republican Leader John Boehner (8/24): "President Obama should ask for and accept the resignations of the remaining members of his economic team, starting with Secretary Geithner and Larry Summers, the head of the National Economic Council… Now, this is no substitute for a referendum on the president's job-killing agenda. That question will be put before the American people in due time. But we do not have the luxury of waiting months for the president to pick scapegoats for his failing 'stimulus' policies."
  • Obama (8/30): “Unfortunately the [jobs] bill has been languishing in the Senate for months – held up by a partisan minority that won’t even allow it to go to a vote. That makes no sense… and there’s no reason to block it other than pure partisan politics.”
  • Rep. Paul Ryan, R-Wis., ranking Republican on the House Budget Committee (8/30): “The Democrats' stimulus policies are failing miserably and the spending will buy the United States a lost decade similar to Japan's.”


It’s obvious the leaders in Modern Day Rome are more focused on each other’s perceived failures to effectively implement a winning strategy. And, as to be expected, the scoreboard is running in the wrong direction for Team U.S.A. 2Q GDP was revised down 80bps to a modest 1.6%; unemployment is at 9.5% and looks to trend higher after yesterday’s ADP employment report miss and the trailing four week average of initial jobless claims rose to a YTD high of 504k; ABC Consumer Confidence fell wk/wk to (-45); and the Rasmussen Presidential Approval Index averaged (-16) for the entire month of August – one point off the all-time low on a monthly basis.
Despite what Jeremy Siegel and Barton Biggs tell you this morning, evidence of slowing growth is all around us. Considering, can we count on the Fiat Fools in Washington to come together as a team and lead us to a fourth quarter comeback for the ages?
I wouldn’t bet on it. Keep managing risk.
In the meantime, our CEO Keith McCullough and Managing Director Daryl Jones will be joined by former White House Deputy Chief of Staff Karl Rove to discuss the midterms elections on Tuesday, September 7th at 2:30pm. If you are a institutional subscriber or a prospective institutional subscriber and would like to join email us at
Darius Dale


MPEL up/Wynn down.  With detailed data in hand, the shifts look more sustainable.



Macau gaming revenues grew almost 40% YoY in August.  Considering the stronger pace in the first half of the month, 40% growth is a little disappointing.  In looking at the breakdown between Mass revenue, VIP revenue, and VIP hold, it doesn’t look like luck played a major factor in the month. 


In terms of market share, MPEL and Wynn moving in opposite directions is the most interesting trend.  We saw it in July and here again in August.  As can be seen in the following market share charts, Wynn’s market share fell again, to 14.2% from 15.0% and 17.4% in July and June, respectively.  On the other hand, MPEL had another strong month with its highest market share in almost a year, and it was mostly VIP volume related, not just high hold. 


Wynn VIP hold % was consistent with last year but surprisingly, Wynn lost a lot of Mass share, down 180bps sequentially to 9.2%.  August was the 2nd lowest ever for the company.  Owing to an easy comparison, Wynn did grow total revenue 50% YoY, although high margin Mass only climbed 9%. 


LVS seemed to hold very well on VIP which pushed up their market share to 19.9%, still below its TTM average.  SJM played unlucky on the VIP tables which pressured their market share significantly sequentially.  Finally, as we expected, MGM is starting to build market share due to the addition of a new junket, “David Star”, which had been active at Wynn (thanks Mr. Kwong).







Rolling Claims Improve Slightly, but Do Little to Counter the Bigger Picture Slowdown

Initial unemployment claims fell 1k last week to 472k (6k after revising the prior week). Rolling claims fell 2.5k to 485.5k. For perspective, rolling claims are roughly 75-100k higher than they need to be in order for unemployment to improve.


Our firm remains of the strong view that US economic growth is going to continue to slow markedly in the back half of this year and into 2011. We think this will keep a lid on new hiring activity as management teams focus on cost control. All of this raises the risks that a prospective slowdown in GDP will precipitate an incremental slowdown in hiring/pickup in firings, which will, in turn, further pressure growth. We continue to look to claims as the best indicator for the job market, as they are real time and inflections in the series have signaled important turning points in the market in the past.


Rolling Claims Improve Slightly, but Do Little to Counter the Bigger Picture Slowdown - rolling


Rolling Claims Improve Slightly, but Do Little to Counter the Bigger Picture Slowdown - raw


In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.


Rolling Claims Improve Slightly, but Do Little to Counter the Bigger Picture Slowdown - 9


As a reminder, May was the peak month of Census hiring, and it should now be a headwind through September as the Census continues to wind down.


Rolling Claims Improve Slightly, but Do Little to Counter the Bigger Picture Slowdown - census chart


Joshua Steiner, CFA


Allison Kaptur

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