Deflation? Chart Of The Day

POSITION: Long Treasury Inflation Protection (TIP), Short US Dollar (UUP)


Assuming that the man saw this morning’s inflationary spike in the PRICES PAID component of the ISM survey (70.5 SEP vs. 61.5 AUG), we’re quite sure about what Ben Bernanke is doing right now – hoping you don’t see what markets do.


As we like to say at Hedgeye, hope is not an investment process.


Look at the two red arrows in this chart: 

  1. SEPTEMBER 2007
  2. SEPTEMBER 2010 

Heli-Ben didn’t recognize the inflection point in 2007, so we don’t expect him to publically consider the risk management questions now… but what if this debauchery of the US Dollar continues to put upward price pressure on everything priced in dollars?


Don’t forget that the question mark in this chart is the risk – and the risk remains NOT that inflation is born out of currency debasement, but that the mother-load of all inflations (the dotted red line) is actually in play.


We’re quite certain that consensus expects “deflation”, because that’s what the Fed needs to see. What you need isn’t always what you get. Ask 1970’s Fed Head, Arthur Burns, about that.



Deflation? Chart Of The Day - ISM Prices Paid

European Manufacturing PMI Declines for “Biggies” in Europe

Hedgeye Portfolio: Long Germany (EWG), Long British Pound (FXB), bullish on EUR-USD; Short Italy (EWI)


The final September figures for European Manufacturing PMI came out today – in aggregate there is a noticeable downturn in the September figures for the major economies (excluding France), in line with our forecast for weaker European economic data in the back half of 2010. We’ll note that the PMI figures in the tables below do not all come from the same sources, although most do, including the big three Eurozone economies of Germany, France, and Italy, which are issued from Markit/Reuters.  That said, our focus is on the changes in the data on the margin, in particular the month-over-month moves. One highlight here is Scandinavia, which continues to outperform, mirrored by its equity market that is up +14.1% YTD and a growth forecast of 3.6% Y/Y this year (Bloomberg), the highest versus its major European peers. 


To be clear, our position on Europe remains that we see a clear divergence among countries, similar to our Sovereign Debt Dichotomy theme in 2Q10. Currently we are bullish on Germany and continue to warn of further deterioration in the capital markets of countries like Portugal, Ireland, Italy, Greece, and Spain. One TRADE that has worked for us is long EUR, short USD, despite the ongoing sovereign debt contagion threats across the Eurozone. With the Euro rising to $1.37 today, it’s bumping up against our overbought TRADE (3 weeks or less) line of resistance at $1.38, which we’ll be watching acutely. The TRADE line of support remains at $1.34.


Matthew Hedrick



European Manufacturing PMI Declines for “Biggies” in Europe - manu

R3: WMT, DKS, JAH, and E-com


October 1, 2010


More movement in the C-level ranks at Dick’s with the departure of its CMO, while Wal-Mart resets the bar for affordable prescription drugs partnering with Humana in a rare case of cost deflation for the domestic consumer. 




  • Forever 21 continues its quest for retail domination, this time taking one of the most expensive pieces of real estate in Manhattan. The fast-fashion retailer is expected to take a short, sixth month lease on Fifth Avenue formerly occupied by Takashimaya. Clearly Forever 21 believes it can operate in any type of location after signing a sub-lease in a Sears last week and a $1,000 per foot location this week.
  • Keep an eye on supermarkets coming to a mall near you. Mall operators are beginning to experiment with filling vacant space with traditional supermarkets, in an effort to rejuvenate traffic and visitor frequency. Westfield’s Seattle Southcenter mall has seen a 26% increase in traffic over the first few weeks since Seafood City opened in a vacant Mervyn’s location. Aldi also recently inked a deal to open a store in Illinois.
  • According to a Harris Interactive poll, mature consumers (age 65+) are most pessimistic about an improvement in the economy over the next 6 months. While 22% of the overall population expects the economy to improve in the next sixth months, only 8% of those age 65+ expect their financial condition to improve. The echo boomers (18-33) are the most optimistic, with 28% expecting an improvement over the next 6 months.



Wal-Mart Sets Bar for Affordable Prescription Drugs - Wal-Mart Stores Inc., the world’s largest retailer, said it will team with health insurer Humana Inc. to offer the cheapest prescription drug plan in the U.S., as the companies seek to take sales of medications from rivals. The companies will begin marketing the plan today to Americans in Medicare, the U.S. government health program for the elderly and disabled, William Fleming, a Humana vice- president, said in a conference call yesterday. The policies, which take effect Jan. 1, will cost $14.80 a month, less than half the average premium this year, and will boost sales for both companies, Fleming said.  <Bloomberg>

Hedgeye Retail’s Take: This appears to be a win-win for both consumers and WMT given the substantial reduction in the price of the premium.  Given that the elderly are the most challenged demographic from an economic standpoint, we’d expect this program to be well received. We’d also expect others to follow in order to close the price gap.


Dicks' CMO Out - Jeff Hennion, EVP and chief marketing officer at Dick's Sporting Goods, has left the company. According to a filing with the Securities & Exchange Commission, his job was terminated, effective Sept. 24. William Colombo, vice chairman of Dick's SG, will assume the responsibilities of chief marketing officer on an interim basis until the search for a new CMO is completed. Hennion had been EVP and chief marketing officer of Dick’s SG since 2008. Previously, Hennion was SVP — chief marketing Officer, a position he held since 2005. <SportsOneSource>

Hedgeye Retail’s Take: Big shoes to fill for the chain which has built a major presence on the national advertising scene. 


Rawlings Returns to Helmets Business (JAH) - Rawlings is planning to launch a line of football helmets. According to the St. Louis Post-Dispatch, Rawlings is outfitting a limited number of high school, college and professional athletes with helmets this fall in advance of its planned launch in March 2011. The helmets will broaden the company's offerings to complement its line of football pads, gloves, uniforms and apparel. Rawlings stopped making football helmets two decades ago. The article noted that Rawlings' re-entry comes as Schutt Sports in early September was forced to file Chapter 11 bankruptcy protection in early September after losing a patent battle with Riddell. Schutt is appealing a court's $29 million judgment that it has to pay Riddell in the patent infringement case. <SportsOneSource>

Hedgeye Retail’s Take: With concussions finally being addressed with a high degree of seriousness, this is precisely the time for Rawlings to step in and give Riddell some competition. 


Hong Kong Auction Bellwether for High-End Luxury Demand - A jade seal of China’s 18th century Qianlong emperor is one of the star attractions at Sotheby’s 3,200-lot Hong Kong auction that may raise HK$1.6 billion ($210 million) in a test of Chinese demand for art. The seven-day marathon also includes cases of Chateau Lafite Rothschild; a 6.4 carat pink diamond; antiques; jewelry and paintings by masters including Chinese abstract painter Zao Wou-ki, New York-based Sotheby’s said. The sale will show whether rising wealth in China will continue to drive an increase in prices. Sotheby’s said the sale has 800 more lots than its April auction in the city, which took a record HK$2 billion and revived prices in most categories to pre-credit-crisis levels. “The estimate for the fall auction is the highest in our 37-year history of auctions in Asia,” Kevin Ching, Sotheby’s chief executive officer for Asia. <Bloomberg>

Hedgeye Retail’s Take: The days of multi-million Sharks in tanks appear to be in the past as the Asian audience shifts its tastes towards more traditional collectibles. 


Bloggers Beware - Marketers and other corporate communications professionals may sometimes feel they have a thankless task: carefully craft messages about their company’s thought leadership, social responsibility efforts and new product or service launches, only to find those messages distorted as they’re disseminated through the media. PR and communications firm Burson-Marsteller analyzed more than 150 messages sent out by companies in the Financial Times Global 100 list of firms and discovered a large gap between the messages that went out and how they were covered on blogs. Message distortion was highest for companies in Latin America and the US, with a global average of 69% of blog postings not reflecting the message companies were trying to send. According to the report, bloggers tended to include “opinions, personal experience, knowledge of competitors and products, and speculation.” Distorted messages are not a new phenomenon; they have been a problem in mainstream media as well. <emarketer>

Hedgeye Retail’s Take: While the perception of an official presence on blog sites is largely seen as a high risk proposition by most companies given the lack of quality checks, the message here is that it’s a risk worth taking given the misinformation perpetuated by miss/less informed public. 


R3: WMT, DKS, JAH, and E-com - R3 10 1 10


R3: WMT, DKS, JAH, and E-com - R3 2 10 1 10


Latest Research on Online Shopping - 58% of U.S. adults go online to research products and services they are considering purchasing, an increase from 49% who did so in 2004, a new report finds. Further, the number of those who do research about products on any given day has jumped from 15% of adults in September 2007 to 21% in September 2010, according to the report released today by the Pew Research Center’s Internet & American Life Project.  Additionally, 24% of U.S. adults say they have posted comments or reviews online about the products or services they buy, indicating that many consumers are willing to share their opinions about products and their buying experiences, the report says. These new statistics track with other Pew Internet Project data that show more consumers are buying online. For instance, the percentage of Americans purchasing products online rose from 36% in 2000 to 52% in 2010. And the percentage making travel reservations or purchasing travel services such as airline tickets, hotel rooms or rental cars rose from 22% in 2000 to 52% in 2010. <>

Hedgeye Retail’s Take: Believe it or not, some retailers are still on the sidelines in this game and increasingly disadvantaged as a result.





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The Macau Metro Monitor, October 1st 2010




On Wednesday, the Chinese government launched new measures in an attempt to cool rising real estate prices, including raising down payments for home purchases and expanding property tax trials nationwide. Some of these include:

  • 30% down payment on first apartment purchases vs. the previous 20%
  • 50% down payment for second property purchases vs. the preview 40%
  • Buyers of luxury apartments in Beijing (2MM Yuan+) must pay an extra 200,000 Yaun
  • No loans for buyers of 3rd properties
  • Trial property taxes rolled out in Shanghai, Shenzen, Beijing, and Chongqing



A "well informed" source told the Macau Daily Times yesterday that, “The numbers were already very close to the MOP 15 billion-mark by September 29. Casinos might pocket something between MOP 15 to 15.5 billion in September.”


TODAY’S S&P 500 SET-UP - September 30, 2010

As we look at today’s set up for the S&P 500, the range is 14 points or -0.11% downside to 1140 and 1.12% upside to 1154. Equity futures are trading above fair value as Asian and European markets rally on strong Chinese PMI data. Crude oil remains close to a 7-week high on the prospects for improving growth and on news of political unrest in Ecuador.

Today is a busy day for macro releases with September ISM report, August Personal Income/Spending figures and the final reading to September's UofM Consumer Confidence.

  • Accenture (ACN) sees FY 2011 EPS up 13%-16% vs previous 12%-15%, implying $3.00-$3.08 vs estimate $2.90
  • Gymboree (GYMB) is considering putting itself up for sale, WSJ reports
  • Hewlett-Packard (HPQ) appointed former SAP CEO Leo Apotheker as CEO and president, succeeding Mark Hurd
  • Lawson Software (LWSN) sees 2Q adjusted EPS $0.11-$0.12, vs estimate $0.12
  • MetLife (MET) said interest rate of 2.5% on 10-year Treasuries would reduce 2011 earnings by ~$0.20 per share
  • Teekay Tankers (TNK) plans to offer 8.2m shares


  • One day: Dow (0.44%), S&P (0.31%), Nasdaq (0.33%), Russell 2000 (0.22%)
  • Year-to-date: Dow +3.49%, S&P +2.34%, Nasdaq +4.38%, Russell +8.11%


  • VOLUME: NYSE - 1283.38 (+26.79%)  
  • SECTOR PERFORMANCE: Long live REFLATION - Only one sector up yesterday XLE
  •  MARKET LEADING/LAGGING STOCKS YESTERDAY: Devry 4.95%, American International +4.41% and Tyson +3.89%/Prudential -4.16,CF Industries -3.88% and JDS -3.35%
  • VIX: - 23.70 +1.94% - YTD PERFORMANCE: (+9.32%)
  • SPX PUT/CALL RATIO: 1.76 from 1.42 +23.82%


  • TED SPREAD: 13.48 -0.203 (-1.481%)
  • 3-MONTH T-BILL YIELD: 0.16%
  • YIELD CURVE: 2.11 from 2.11


  • CRB: 286.86 +0.33%
  • Oil: 79.97 +2.71%
  • COPPER: 365.15 -0.27%
  • GOLD: 1,307.52 +0.18%


  • EURO: 1.3621 +0.07%
  • DOLLAR: 78.72 +0.04% - An up day! Not going to last!




  • FTSE 100: +0.89%; DAX +0.73%; CAC 40 +0.49%
  • Major indices have started the final quarter on a positive note following on from gains seen across Asia helped by strong Chinese PMI data for Sep.
  • Oil & Gas and Basic Materials are pacing gainers as commodity prices gain.
  • European PMI data painted a mixture of manufacturing strength across the region
  • Repsol (REP.SM) announces jv with China's Sinopec (SNP) to develop Repsol's Brazilian assets
  • Eurozone Sep Final Manufacturing PMI revised up 53.7 vs Flash 53.6
  • Germany Sep Final Manufacturing PMI 55.1 vs prelim 55.3
  • UK Sept manufacturing PMI 53.4 vs cons 53.8


  • Nikkei +0.37%;Shanghai Composite (closed)
  • Strength in commodity prices including a surge in crude oil to the highest in seven weeks helped equities across the region.
  • Strong Chinese PMI helping sentiment.
  • Nikkei up on expectations that the BoJ will take additional steps towards monetary easing at its policy meeting next week.
  • Japan Aug jobless rate 5.1% vs cons 5.2%, core CPI (1%) y/y vs cons (1%); overall Aug CPI (0.9%) y/y
  • China manufacturing Purchasing Managers' Index 53.8 vs prior 51.7

Howard Penney

Managing Director


THE DAILY OUTLOOK - levels and trends














The New Storytelling

“Prosperity and overconsumption was driven by asset inflation that in turn was leverage and interest rate correlated.”

-William H. Gross


From my inbox, I’ve been a long time student of Bill Gross. He is one of the most influential teachers on the buy-side. He’s a great communicator. He’s somewhat transparent about his positioning. And he’s certainly accountable to his investors’ returns.


He’s also got the US Federal Reserve in his back pocket.


I’m highlighting the aforementioned quote from Gross’ Investment Outlook missive for October titled “Stan Druckenmiller is Leaving”. It’s one of those macro sentences that you need to read slowly. Then you need to read it again. It’s solid, but it needs a little love. Subtract the qualitative word PROSPERITY and add the words DOLLAR DEVALUATION. Then you’ll see Hedgeye’s New Reality intersect PIMCO’s New Normal.


“Overconsumption was driven by asset inflation that in turn was leverage, interest rate, and Dollar devaluation correlated.”


Not that I keep track, but we introduced The New Reality before Gross went with The New Normal. The New Reality abides by the principles of chaos theory. The New Reality is that normal is grounded in uncertainty. The New Storytelling of global markets will be shaped by the math that backs it.


So let’s dig into some math…


As of last night’s Q310 closing prices, here are the top 10 inverse correlations (using our immediate term TRADE duration) versus the US Dollar Index:

  1. America’s SP500 = -0.89
  2. India’s SENSEX = -0.91
  3. Brazil’s Bovespa = -0.92
  4. Reuters CBR Commodities Index = -0.96
  5. Gold = -0.96
  6. Copper = -0.89
  7. Silver = -0.97
  8. Cotton = -0.91
  9. Sugar = -0.94
  10. Rice = -0.92

The first thing you should say about anything in the area code of a 0.90 correlation is wow. The second thing you should say to the government that perpetuates this debauchery of your currency is shame on you.


As for Mr. Gross, I’m not quite sure what to say. After all, he does run the world’s largest bond fund – and that fund proved to not do so well during the DOLLAR DEVALUATION days of 2008.


That’s not a shot at Bill Gross. That’s reality. If you debauch the currency of a nation, you will ultimately get inflation. Sequentially rising inflation is bad for bonds. When oil hit $150/barrel and copper was at $4/lbs, neither Greenspan nor Bernanke saw inflation, but PIMCO’s investors did. Overlay PIMCO’s Total Return Fund with Treasury Inflation Protected securities (TIPs) for the first 9 months of 2008 and you’ll get the picture.


The New Reality is that Bill Gross gets paid to talk about the New Normal, not QE’s impact on the US Dollar. On our immediate term risk management duration, the US Dollar has an inverse correlation versus the PIMCO Total Return Fund of … drum roll for the storytellers in the Haven… -0.91!


What we’ve learned in the last few years is that DOLLAR DOWN = REFLATION until these inverse correlations get too high and REFLATION becomes INFLATION. Sure, there’s deflation in US Housing – but there’s been longstanding deflation in the price of tulips and Japanese real estate too.


The US Dollar is getting annihilated (down 15 of the last 18 weeks and down -11% since June). Those getting paid by this may not care, but the other 95% of people who live in this country do. How else could the US stock market have its best September since 1939 and US consumer confidence drop?


I bought back my inflation protection in both the Hedgeye Portfolio and Hedgeye Asset Allocation Model yesterday (TIP). My immediate term support and resistance levels for the SP500 are now 1140 and 1155, respectively.


Correlations in markets are never perpetual, but The New Storytelling of Wall Street is.


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


The New Storytelling - gross

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