With the current administration playing defense ahead of midterms in November, a positive bias to the jobs picture is all but assured as we head into the elections.  To be clear, the fudging of government data happens whatever party is in the ascendency, but politics will play a particularly significant role in government-reported statistics over the next few months.  This is the reality for GDP, inflation, and jobs.


This point has been made by various sources over the past few days but I think it speaks further to the theme of opacity, if not outright bias, in government numbers that we have been highlighting ad nauseum.  


There are two ways (maybe more) the government can manipulate the jobs data to make things look better than they appear.  The first way was highlighted in a post entitled, “FRIDAY MACRO MIXER: THE PAYROLL FUDGE FACTOR”, I discussed the implications of the Birth/Death model on the credibility (or lack thereof) of the payroll data.  As I wrote on Friday, the last benchmark revision released by the BLS indicated that the Birth/Death model numbers were grossly understating job losses and, as such, is not reliable. 


The second way the BLS distorts the numbers is through the headline unemployment rate, which is being deflated by changes in the Labor Force Participation Rate. 


Since BLS unemployment data begins, 1948, the proportion of the civilian population working or seeking work has generally been growing.  This is largely as a result of women entering the workplace and long-term growth in the U.S. economy through the 20th century.  The 1950’s saw year over year increases in the labor force participation rate of 210 bps – more than three standard deviations from the mean of all available data (January 1948 to present).  Recently, there has been a period of precipitous decline in labor force participation rate, peaking at a year-over-year decline of 120 bps – two standard deviations from the mean – which is important to note. 


The chart below details where the unemployment rate would be if the labor force participation rate was at its ten-year average level of 66.1%; for the year-to-date, it has been averaging 64.8%.  This implies that many folks are losing heart and dropping out of the job hunt.




An early indication the surprisingly positive labor market report from last week will not continue.  The ISM purchasing managers nonmanufacturing (services) survey for August showed a plunge in its employment component.  As seen in the chart below.




With the November elections right around the corner, the “spin” from both parties will reach fever pitch.  With respect to government data, we expect the numbers to remain close to consensus ahead of midterms.



Howard Penney

Managing Director

The Greek Canary in the European Coal Mine

Conclusion:  Sovereign debt issues in Europe have not gone away.  In fact, Greek CDS are approaching the highs of June, which we believe are a leading indicator for more issues to emerge on the debt front from Europe.


Just when we thought things were settling down in Europe, credit default swaps in at-default-risk nations continue to increase.  In the chart below, we’ve highlighted Greek 5-year CDS.  While we are not quite at the parabolic highs of late June, when insurance for 5-year Greek bonds reached almost 1,150 basis points, we are well off the lows of May.  In fact, CDS are up almost 50% from their lows this summer.  Interestingly, the lows were put in literally the day the EU bank test results were released. 


The Greek Canary in the European Coal Mine - 1


Back in March 2010 in our theme presentation entitled, “Where Does the Sovereign Debt Cycle End?”, we highlighted a few points related to Greece. Specifically, 

  • Greece is typically a leading indicator for defaults in Europe;
  • Debt in Europe is very interconnected, so one nation defaulting could have an impact on the balance sheet of many banks in other nations that hold that debt (we’ve posted a graphic highlighting this at the bottom of the note); and
  • The unreliability of Greek numbers as noted by the fact that in late fall of 2009 they reported their budget deficit was 3.7 percent of GDP and two weeks later that number was revised upward to 12.5 percent. 

The point is, Greek could be worse than we know and there will be a domino effect if Greece unravels.


To the lack of understanding the numbers point, the Wall Street Journal wrote an article yesterday criticizing the efficacy of the recent stress tests. The key point from the article was that the stress tests potentially understated the debt levels of many banks.  To highlight this point, we’ve posted a chart from this article directly below. If the analysis is in the ball park of reality, the stress tests missed the mark by a staggering margin. 


The Greek Canary in the European Coal Mine - 2 


Not surprisingly, the Council for European Banking Supervisors released a statement attempting to rebuke this criticism. The key points from the statement, which defended the tests, are highlighted below: 

  • The “gross exposures” disclosed were on-balance sheet exposures net of impairments but gross of collateral and hedging. 
  • CEBS notes that comparison with other sources should be treated with caution as a result of different reporting dates and reporting methodologies. For instance, data provided by the Bank for International Settlements (BIS), is aggregated in a way which makes comparison with the data disclosed by banks during the CEBS exercise impossible. 

Maybe it’s just me, but with a defense as non-transparent as that, it is really no surprise that the market is once again losing confidence in the at-risk European sovereigns.


Chirp, chirp says the Greek Canary.


Daryl G. Jones

Managing Director


The Web of European Debt


The Greek Canary in the European Coal Mine - 3

EARLY LOOK: Someone Gets to be Canadian

This note was originally published at 8am this morning, September 8, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.




“Somebody gets to be smart and somebody gets to be dumb. If we win, it'll be because of the President. And if we lose, it'll be because of me.”
-Karl Rove



Yesterday afternoon at our offices in New Haven, CT, Daryl Jones and I hosted former White House Deputy Chief of Staff and Senior Advisor to President George W. Bush, Karl Rove, for a political strategy conference call.
For the record, before you call me a raging Republican, remember that I am neither a Democrat nor a Republican. I am Canadian (with a green card and an American son who has much better chances of wearing his country’s Olympic hockey jersey on this side of the border!).
I, like most immigrant small business owners in this country, fundamentally believe in doing the best I can to provide for both my American family and American employees. This includes analyzing and understanding US political policy as it is going to affect markets and my firm’s future.
If I couldn’t stand Karl Rove’s politics, I’d still have invited him to our offices to meet with us. How else would a Risk Manager of both global market strategy and local payroll-punching get to the right answers?
It turns out that Rove was perfectly analytical and proactively prepared with plenty of math. The data, after all, doesn’t lie as much as some of America’s current politicians do. That said, the data can still change before the mid-term elections in November.
Daryl Jones will publish a more in depth research note later on today that covers some very interesting intermediate to long term US political strategy topics that we dug into with Mr. Rove in our Q&A session (the changing US electorate, small business healthcare spending, taxes, etc.).
For now, I’ll spare you having to watch the DVR version of this weekend’s Meet The Press where CNBC’s money-honey-mini, Erin Burnett, espoused her unqualified US political strategy thoughts about how the economy has seen the “stimulus really work” and give you some proactive political predictions that you can hold Karl Rove to:
1.      The Republicans will win the House by a wider than expected margin.

2.      The Democrats will cede at least 8 seats to the Republicans in the Senate.

3.      The anti-incumbent vote in America will be pervasive theme.

“Anti-incumbent” means anti any professional politician in Washington who sold you a bill of dry heaves in the most recent election, or as Mr. Rove called them, incumbent politicians with a “D” after their name who are perceived to be easiest to blame. Shock-and-awe, eh? A Republican strategist concluding that the Democrats are going to get rolled over in the mid-terms!
Well, take it from one Canadian with an American family looking to be on the right side of this immediate term TRADE rather than get stuck in the partisanship of being wrong and blaming someone else’s politics for it – I think Rove’s got this one right.
If you’d like the slide deck that backs Rove’s analysis and the replay of the conference call, please email <> . I’ll be happy to print the most analytical rebuttal to Mr. Rove’s conclusions, provided that you let me print your name on the analysis like he did with his. This is the only way I know to strap on the accountability pants folks. I’d much rather be proven wrong here than remain wrong…
Whether we like politics or not, we all have to play the risk management game that’s in front of us. To spend or not to spend more taxpayer moneys on “stimulating” the economy, remains the question.
The SP500 was down -1.2% yesterday to 1091, taking its cumulative decline since its YTD high on April 23rd to -10.4%, and its YTD loss for 2010 to -2.2%. Was yesterday’s weakness related to an expectation mismatch associated with an alleged “better than expected” employment report on Friday? Or was it based on another partisan “spending plan” of $50 BILLION that Americans don’t buy into?
Plenty more questions remain for the Fiat Spending Bulls this morning than there are answers. I don’t need Karl Rove to remind me of that. My immediate term support and resistance levels for the SP500 are now 1086 and 1107, respectively.
Best of luck out there today,

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The analysis below is taken from this morning's Healthcare First Look, a daily piece that marries top-down macro and bottom-up fundamental analysis with the intent of delivering actionable investment ideas within the Healthcare sector. Institutional subscribers and trialers, please email if you'd like to hear more about the work Tom Tobin and Christian Drake are doing within the Healthcare sector at Hedgeye.



Karl Rove was a little taller than I expected.  He was also more analytical than I expected in his prediction of the midterm elections.  While his analysis has political underpinnings, those views were not the core of his call.   His primary source of data was simply available polls with some colorful anecdotes from meetings that come from having Karl Rove’s rolodex.  At the end of the day, it was a familiar process to which just about every Wall Street fundamental analyst subscribes.


Whether it is Karl Rove’s analysis of publicly available polls, or Professor Ray Fair’s national data analysis (Bloomberg 9/8/2010), or the current $70 price on the Intrade contract, Republicans will likely resume control of the House of Representatives.  This has implications for real policy changes, or the minimum, the lack of progress.


For Healthcare the important themes that fall out of a Republican House of Representatives are as follows.


Deficit Reduction/Spending Cuts

Healthcare spending is the key contributor to long run federal and state spending.  With the political discussion having already moved to “paying for” new spending with budget reductions, the policy shift is already in place. 



Longer term, the election implications extend spending pressure from a Republican election advantage for many years to come from redistricting.  The trends in support for Republicans retaking the House are affecting Governor races as well.  With the 2010 Census being implemented through redistricting, and key states led by Republican Governors and Legislatures, there may be a long term Republican advantage.


Policy Implementation:


Public Hearings:  Karl Rove suggested Republican Committee Chairman would use hearings to affect change.  He specifically mentioned the idea of calling Dr. Berwick, who was President Obama’s recess appointment to head CMS.   Based on Dr. Berwick’s record and public comments (also easily found with a browser) political pressure from a Socialist label, while politically valuable, may also handcuff him administratively.


Health Reform Rules:  Investigating the affect of Health Reform on employer sponsored health insurance seems another likely topic.  Both a contact of Karl Rove’s and one of mine, both of whom run small businesses, will likely drop coverage for their employees saving money by paying the smaller penalties set up by the legislation.  Again, an easy political point to raise, but one that may also impact HHS decision making as specific policy rules and guidelines are written.


The market seems like it should get this, as all of the analysis is based on data readily available with a browser.   The Intrade contract crossed 50% odds at the beginning of July and made a massive move in August.   But looking at the performance across Healthcare subgroups since July 1 and August 1, there is not a clear pattern across individual stocks.  


The only standout has been Managed Care, which has led across both periods and clearly would benefit from moderation in Health Reform implementation, or the long odds of Health Reform repeal.






The low-volume action continued yesterday as broader healthcare and the XLV dropped 120bps & 60bps, respectively.  Internals were mixed with the A/D across our aggregate index at 14%/86%  while total volume held 12% & 21% below the 10-day and 30-day averages.  The XLV currently sits positive TRADE & TREND in the HEDGYEYE Sector Model closing 2 cents above the TREND line.  The next level of TRADE resistance remains north at $29.31


Generics outperformed yesterday on the back of BVF which ran for 10% following positive P&L news out of VRX.  Generics currently sits as the lone subgroup flashing positive divergence across durations in our 1 STD subsector divergence model.


BMY’s string of pearls strategy got its next pearl in the form of ZGEN as the company made a $885M move to consolidate its HCV product line and further buttress its pipeline with mid-to-late stage prospects.   


Insurer’s are back in the headlines with Aetna & the Blue plans announcing the need to raise individual & small business rates to offset reform related provisions.  According the WSJ (Here) the reform provisions, including “letting children stay on their parents' insurance policies until age 26, eliminating co-payments for preventive care and barring insurers from denying policies to children with pre-existing conditions, plus the elimination of the coverage caps” relate directly to the premium growthInterestingly, its these same provisions that continue to score well in Kaiser’s Health Tracking Poll (you can find the latest Kaiser poll results Here). Managed Care dropped 1.0% to start the week, but has outperformed over the past two weeks and is the best performing subgroup since July 1st.


Meanwhile, healthcare continues to take baby steps towards a consumer based model as consumer reports (NYT article Here) has begun rating surgical groups based on heart bypass surgery.  This coincides with a push by federal and local agencies to increase transparency & price discovery through online posting of surgery/therapy costs by insurer’s and providers.






Thomas Tobin

Managing Director


Christian B. Drake


R3: PSS, RL, ARO, Tapout, NFL…



September 8, 2010



From mixed martial arts brand acquisitions to NFL licenses and the opening of the new Ralph Lauren men’s store in the NYC, there’s certainly a masculine bias to this morning’s happenings...





  • A survey by BIGresearch and the NRF suggests that the implementation of a federal VAT would reduce spending by 64% of consumers.  Specific areas in which respondents would cut back included: eating out (83%), clothing and accessories (80%), food/groceries (74%), entertainment (72%) and travel (72%).  Only 10% of those surveyed were in favor of a VAT to reduce the deficit while 80% are in favor of reduced government spending as a means to handle the deficit.


  • Online private-sale retailer appears to be in the midst of a PR storm. It turns out that a handful of customers were charged more than advertised prices during the company’s end of season women’s sale. Originally the company fluffed off the issue, but an article in WWD on the subject is sure to rectify the situation much more quickly than originally planned. Keep in mind that in some states it is illegal to charge more than advertised prices, even if it’s a mistake.


  • First it was Canada, now it’s Brooklyn. After a flurry of recently announced store opening plans focused north of the border, we’re now seeing Brooklyn attracting national chain stores. This time word has it that Aeropostale will be opening a new store Downtown. Recall that Apple has long been rumored to be opening a store in the borough as well.


  • E-mail remains by far the most popular mobile internet activity, taking up 41.6% of a users time according to Nielsen. Portal usage comes in second, representing 11.6% of time spent, while social networking continues to grow and represents about 10.6% of usage time.  All in despite reports to the contrary, e-mail remains by far the most popular mobile internet activity.




Authentic Brands Group Acquires Tapout and Silver Star Casting - Authentic Brands Group, LLC, has acquired Tapout and Silver Star Casting Company (Silver Star), two of the biggest names in the mixed martial arts (MMA) industry. The buys mark the first major acquisitions for Authentic Brands Group, a buyout group formed by Leonard Green & Partners and Knights Bridge Capital and led by James Salter. <>

Hedgeye Retail’s Take: MMA continues its meteoric rise into the sports arena limelight – this time with a noteworthy endorsement of sorts from Wall Street. Atypical in almost every way, from a CEO named “Punkass,” to the trajectory of its revenues from ~$16mm in 2006 to ~$200mm in revenues last year, Tapout is a certainly a crown jewel of sorts in MMA.


Saucony Appoints Chris Lindner as SVP, Chief Marketing Officer - Saucony, Inc. appointed Chris Lindner to the newly created role of senior vice president/chief marketing officer. Prior to his new role at Saucony, Lindner was vice president of global marketing at Converse Inc., a subsidiary of Nike, Inc., where he oversaw all marketing execution throughout North America as well as the brand's global regions. <>

Hedgeye Retail’s Take: Chris Linder is one of the good guys. Loss for Converse, but good for PSS. Collective Brands continues to fuel the fastest growing brand in its portfolio. With the company focused on growing the brand in Europe, expect Linder’s experience to contribute heavily there.  It’s a shame that no one cares about this part of PSS’ portfolio.


Airwalk Goes Old School - Aiming to meet demand for products from its archives, Airwalk relaunched its website last month with e-commerce. The new site features classic products, as well as signature shoes from Airwalk athletes. “Eighty percent of visitors to our site wanted to buy product,” said Tiffany Fraser, Airwalk’s e-commerce manager. “Our product methodology is to offer old-school styles, nothing that you would see anywhere else. You won’t find it anywhere in the U.S.” The site debuted with a focus on its classic Desert Boot, Prototype 540, and Prototype 600 styles. About 300 pairs of each will be available to consumers, and two to four major launches, with apparel pairings, will roll out each year. <>

Hedgeye Retail’s Take: Going retro is hardly new, but this is consistent with Collective Brands commitment to growing its branded portfolio - we’ll need to see much more from PSS in 2H.


R3: PSS, RL, ARO, Tapout, NFL… - R3 1 9 8 10


Retail Space Availability to Drop in 2011 - Space available for lease at U.S. local retail centers will decline next year for the first time since 2005 as consumer spending rises, according to commercial broker CB Richard Ellis Group Inc. The availability rate, which refers to space being actively marketed and ready for tenant construction in a year, will fall to 12.8% for neighborhood and community shopping centers at the end of 2011 from a peak of 13.2% in the second half of this year. National chains that rent space from Kimco Realty Corp., the biggest U.S. owner of community shopping centers, have “selectively resumed their expansion strategies,” David Henry, the company’s chief executive officer, said on a July 28 conference call. The availability rate at community and neighborhood shopping centers was 13.1% in the second quarter, up from 12.2% in the same period a year earlier. The rate probably will fall to 12.1% at the end of 2012. Rents may not rise at neighborhood and community retail centers before 2012.   <>

Hedgeye Retail’s Take: This may be a minor sequential improvement but the real impetus for improving vacancy rates will be both a sustained pick up in square footage growth coupled  by further rent relief.  Capacity remains in check as new developments still show little signs of picking up.  For now it’s a waiting game to see which comes first, rent or growth.


NFL to Revamp Apparel Licenses - The National Football League is exploring opening up its apparel licenses to other manufacturers. The rights are currently held by Reebok in a deal that ends at the close of next season. According to a report in Sports Business Journal, categories such as on-field, youth, headwear and performance will be broken out into their own distinct categories that would be available to new licensees. <>

Hedgeye Retail’s Take: We can debate all day whether this strategy makes sense, but let’s face a fact… the NFL is doing what all high profile licensees do – they are beginning to negotiate through the press. Their ultimate goal is likely to keep Adibok, but at a higher ticket.


RL Introduces the Converted Rhinelander Mansion as the Home Base of Men's Wear - Today, the designer will take the wraps off the Rhinelander Mansion, which has been converted to a men’s-only retail emporium. Women’s wear has been relocated and will share a newly constructed 40,000-square-foot home across the street, to be completed next month. Although Polo Ralph Lauren Corp. has embraced digital platforms for selling and marketing product, it also continues to raise the bar for the in-store experience. <>

Hedgeye Retail’s Take: The highly anticipated men’s store is here. With men’s typically relegated to basement or back room locations, this store is guaranteed to offer a  new experience. While highly unlikely to surpass the productivity of the women’s store across the street, it’s worth noting that this store has been under construction (and behind plan) and will finally have revenue associated with what has been a liability.   


R3: PSS, RL, ARO, Tapout, NFL… - R3 2 9 8 10

R3: PSS, RL, ARO, Tapout, NFL… - R3 3 9 8 10

R3: PSS, RL, ARO, Tapout, NFL… - R3 4 9 8 10


BOOT Opens New Manufacturing Facility - LaCrosse Footwear Inc. has opened a new manufacturing facility in its home city of Portland, Ore., to produce the Danner brand. Located in an industrial building about one mile from the company’s headquarters, the factory contains roughly 59,000 square feet, representing twice the footage of the firm’s previous factory there. According to LaCrosse CEO Joseph Schneider, the facility will be able to better meet the growing worldwide demand from its customers in the work, military, law enforcement, outdoor recreation, hunting and Japanese markets. <>

Hedgeye Retail’s Take: New capacity is not typically worthy of a callout, but this is notable due to the fact that we are talking about a new/expanded DOMESTIC footwear manufacturing facility when ~98% of footwear is still produced overseas. LaCrosse Footwear, however, only outsources ~60% of its production overseas.


Gucci to Offer $750,000 Speedboat With Italian Yacht-Builder Riva in 2011 - Gucci, the Italian luxury brand owned by Paris-based PPR SA, said it will introduce made-to- order speedboats next year, with prices starting from 590,000 euros ($750,000). The vessels will be produced in partnership with yacht- builder Riva to help mark Gucci’s 90th anniversary in 2011, the Florence, Italy-based fashion company said today in a statement. <>

Hedgeye Retail’s Take: I had to check the date on this piece twice as it sounds like something we’d have seen back in 2007. While consistent with a luxury lifestyle, involvement in yachting is rarely a positive from a financial perspective.




TODAY’S S&P 500 SET-UP - September 8, 2010

As we look at today’s set up for the S&P 500, the range is 21 points or 0.53% (1,086) downside and 1.39% (1,107) upside.  Equity futures are trading mixed tracking a weak close in Asia and lower European indices as worries about the state of some European economies and the banking sector keep investors away. Today's macro highlights include: MBA Mortgage Purchase Applications, Beige Book and July Consumer Credit.

  • President Obama is expected to say that Bush-era tax cuts for the wealthiest Americans shouldn’t be extended when he speaks in Cleveland at 2:30 p.m.
  • Altera (ALTR) boosted 3Q rev. growth forecast to 10%-14% from 4%-8%
  • AngioDynamics (ANGO) forecast 1Q EPS 7c-8c, vs est. 11c
  • Phillips-Van Heusen (PVH) boosted FY adj. EPS guidance to $3.70-$3.80 from $3.55-$3.65, vs est. $3.62
  • RTI Biologics (RTIX) cut FY EPS forecast to 10c-12c from 15c-17c
  • UDR (UDR) agreed to buy five communities in Calif., Mass and Md., and one pre-sale venture in Mass., for $455.1m
  • Wet Seal (WTSLA) plans to buy back as much as $25m shares


  • One day: Dow (1.03%), S&P (1.15%), Nasdaq (1.11%), Russell 2000 (2.19%)
  • Month-to-date: Dow +3.25%, S&P +4.05%, Nasdaq +4.49%, Russell +4.52%
  • Quarter-to-date: Dow +5.80%, S&P +5.93%, Nasdaq +4.72%, Russell +3.74%
  • Year-to-date: Dow (0.84%), S&P (2.09%), Nasdaq (2.66%), Russell +0.63%.


  • ADVANCE/DECLINE LINE: -1416 (-3115)
  • VOLUME: NYSE: 830.38 (-12.24%) - summer is no longer an excuse
  • SECTOR PERFORMANCE: All sectors were down yesterday
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Oracle +5.85%, US Steel +4.57% and Newmont +1.97%/Goodyear Tire -6.02%, H&R Block -5.94% and KLA -5.57%
  • VIX: 23.80 +11.7% - YTD PERFORMANCE - (+9.8%)            
  • SPX PUT/CALL RATIO: 2.00 from 2.08


  • TED SPREAD: 17.18 0.468 (2.797%)
  •  3-MONTH T-BILL YIELD: .14% trading flat
  • YIELD CURVE: 2.12 from 2.20  


  • CRB: 273.81 +1.04%
  • Oil: 74.09 -0.68%
  • COPPER: 347.05 -0.84% - First down day in three
  • GOLD: 1,256 +0.55%


  • EURO: 1.2732 -1.12% - Looking to be down for three days
  • DOLLAR: 82.82 +0.95% - two day rally




  • Nikkei (2.18%); Hang Seng (1.46%); Shanghai Composite (0.11%)
  • Asian markets followed Wall Street down today.
  • In China, financials slumped, and property stocks went down on a report that the government may launch a new round of measures to cool the property market.
  • Steel stocks fell on profit-taking.



  • FTSE 100: (0.61%); DAX: (0.65%); CAC 40: (0.54%) (as of 04:55 ET)
  • European markets opened modestly lower, pared declines to trade little changed, with pan-European indices seeing slight gains, before moving sharply lower as concerns over the financial sector again hurt sentiment.
  • Peripheral markets led declines as worries over Irish banks continued and news that National Bank of Greece will raise approx €2.8B in capital sent Greek banks down over (5%).
  • Defensive sectors led performance, with three sectors, utilities, food & beverage and healthcare, trading higher on the day. 

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