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Malthusian Tails

“The power of population is indefinitely greater that the power in the earth to produce substance for man.”

-Thomas Malthus


Any regular reader of our work, especially when Keith is penning the Early Look, is familiar with our work on investment durations.  Our investment process enables us to develop investment ideas on 3 durations: TRADE (3 weeks or less), TREND (3 months or more), and TAIL (3 years or less).  We call this our Trade-Trend-Tail Process.


There is, of course, another duration, which I will simply call the longer term.  This is the time frame beyond 3 years.  While it is difficult to make an investment decision today, for an event that will happen beyond 3 years, that doesn’t mean we shouldn’t be contemplating the longer term.  One key force that will shape the longer-term with some predictability is demographics.


One of the most well known and earliest recorded demographers was the Reverend Thomas Robert Malthus.  His primary work on this front was his treatise, “An Essay on the Principle of Population”, which he published in 1798 at the age of 32.  Malthus started with the basic premise that society could not be improved with time, so as population increased, so too would the constraints on that society.  Eventually, a large enough population would not be self sustaining and, as Malthus wrote:


“The superior power of population cannot be checked without producing misery or vice."


In contrast to Malthus, if we have learned anything over the last few centuries it is that the welfare of societies can and will improve with population growth in conflict with Malthus’ primary tenet, but Malthus did leave us with a few salient points: 1) demographics are powerful and 2) changing populations will constrain societies.  Below we’ve outlined 3 key Malthusian Tails that we are focused on.


1.  Marriage Rates in the United States - We wrote an intraday note on this point to our Hedgeye Macro subscribers earlier this week (if you aren’t currently receiving our full product, please email us at to set up a trial); in the last decade we have seen a dramatic shift in marriage status among young adults.  In fact, in 2000 almost 55% of the 25 – 34 cohort was married, while 35% was never married.  Amazingly less than 9 years later, by 2009, only 45% of that cohort was married, while 46% of the cohort was unmarried. 


Naturally, as people marry later, birth rates will decline, which will lead to lower population growth in the future and the ability, or lack thereof, to fund future entitlement programs.  Additionally, and near and dear to our Housing Headwinds call, is that homeownership rates are impacted by this demographic shift.  According to the most recent data from the Census Bureau, homeownership rates are 84.2% for married couples and 50.3% and 59.6% for male and female singles, respectively. 


2.  The Aging Japanese Population – One of our Q4 themes was entitled, Japanese Jugular, which describes our long term negative view of Japan.  Once again, a key driver here is demographics, in particular the aging of society.  In 1985, roughly 10% of Japanese society was over 65 years old.  Currently, almost 23% of Japan’s population is over 65 years old.  The great Keynesian experiment in Japan will likely eventually fail because of this aging of society, and its future demands on the government as it relates to retirement and healthcare entitlements. 


Currently, the ratio of retirees to working-age Japanese is equal to 35.5%.  In just ten years time, that ratio will be equal to 48%.  We’ve likely already seen the negative inflection point in this trend within the last year, as Japan’s pension fund announced it will be increasing its asset sales by a factor of 5x to support pension payment requirements.


3.  The Aging Baby Boomers in the U.S. – Our Healthcare Team, led by Tom Tobin, presented a Black Book on this topic last week, which was titled:  “HEDGEYE HEALTHCARE: AGING OF AMERICA: DEMOGRAPHICS OF DEMAND AND PROFITS IN HEALTHCARE.” (If you are an institutional investor and would like to sample or trial some of their superb work on the Healthcare sector, please email sales@hedgeye.com.)


In effect, the glacial movement of U.S. demographic trends holds specific consequences both for healthcare and the larger economy broadly. For Healthcare investors, the Baby Boomer investing dogma mistakenly centralizes per capita spending as the core driver of the thesis.


While absolute per capita consumption is higher for those in their 70s & 80s, the growth rate of healthcare consumption is slower and there are far fewer people to support it.  The period of greatest acceleration of per capita consumption comes as people age into their 50s - a demographic now in the heart of a secular decline which won’t see bottom until 2018.


Boomer Employment (45-64 yr olds) reached its crescendo in the 1 period with peak earnings and peak disposable income occurring alongside historic lows in unemployment.  Now, with this segment of the working population in deceleration mode, the U.S. workforce nearing a peak in average age, and the echo boomer generation (30-39 yr. olds) years away from peak consumption growth, the healthcare and broader economy face significant long-term headwinds.


At risk of starting off your weekend on too somber of a tone, I will leave you with one last aging quote from Groucho Marx that is counter to our thoughts on demographics:


“Age is not a particularly interesting subject.  Anyone can get old.  All you have to do is live long enough.”


Yours is risk management,


Daryl G. Jones


Malthusian Tails - DJEL


TODAY’S S&P 500 SET-UP - October 15, 2010


As we look at today’s set up for the S&P 500, the range is 21 points or -0.92% downside to 1163 and 0.87% upside to 1184. Equity futures are trading modestly above fair value in what has been a quiet pre market session with most investors sidelined ahead of Fed Chairman Bernanke's speech at the Boston Fed Conference which starts at 08.15 ET.


Most don't believe Bernanke will say QE is a given, but on the flip side he is unlikely to dissuade the market from the notion that it's coming sometime soon.  Elsewhere, it is a fairly busy session for corporate and macro releases with Sep Retail Sales and Oct Michigan Consumer Sentiment. Advanced Micro Devices (AMD) 3Q rev. beat est.

  • Cubist Pharmaceuticals (CBST) 3Q rev. missed est, guidance narrowed
  • Google (GOOG) 3Q earnings beat est.
  • J.B. Hunt Transport Services (JBHT) 3Q earnings missed est.
  • Seagate Technology (STX) confirmed it got a “primary indication of interest” to take it private.
  • EPS from GE beat consensus, but missed on revenues.



  • One day: Dow (0.01%), S&P (0.36%), Nasdaq (0.24%), Russell 2000 (0.25%)
  • Month/Quarter-to-date: Dow +2.84%, S&P +2.86%, Nasdaq +2.82%, Russell +4.22%.
  • Year-to-date: Dow +6.39%, S&P +5.26%, Nasdaq +7.33%, Russell +12.68%
  • Sector Performance: Financials (1.78%), Materials (0.95%), Industrials (0.58%), Utilities (0.16%), Consumer Disc (0.12%), Healthcare (0.19%),Energy (0.15%), Consumer Spls +0.04%, Tech +0.04%.



  • ADVANCE/DECLINE LINE: -572 (-2104)
  • VOLUME: NYSE - 1110.61 (-12.58%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: EMC +4.48%, Yahoo +4.46% and First Solar +3.89%/Apollo -23.25%, Devry -16.83% and H&R Block -10.08%.
  • VIX: 19.88 +4.25% - YTD PERFORMANCE: (-8.03%)
  • SPX PUT/CALL RATIO: 1.49 from 1.27 +17.00%



  • TED SPREAD: 15.42
  • 3-MONTH T-BILL YIELD: 0.14% +0.01%
  • YIELD CURVE: 2.14 from 2.09



  • CRB: 299.93 +0.06%
  • Oil: 82.69 -0.39% - BULLISH
  • COPPER: 381.55 -0.13% - OVERBOUGHT
  • GOLD: 1,374.80 +0.36% - BULLISH



  • EURO: 1.4053 +0.75% - BULLISH
  • DOLLAR: 76.647 -0.55%  - BEARISH




European markets:

  • FTSE 100: (0.28%); DAX +0.19%; CAC 40 +0.15%
  • Major indices are treading water ahead of Bernanke's speech in Boston.
  • News flow across the continent has been light with trading volumes reported to be light.
  • Weakness across the mining sector on profit taking has offset small gains seen across the financial services space
  • Eurozone Sep Final CPI +1.8% y/y vs prelim +1.8% and prior +1.6%
  • ACEA new passenger car Registrations for the EU+EFTA (18.6%) y/y in Sept

Asian markets:

  • Nikkei (0.87%); Hang Seng (0.40%); Shanghai Composite +3.19%
  • Most markets fell, but tech stocks rose after earnings releases from AMD and GOOG.
  • China bucked the regional trend to post a healthy gain.
  • Hong Kong recovered early losses but still declined.
  • Exporters led Japan down after yesterday’s rise; financials followed their US peers lower

Howard Penney

Managing Director


CONCLUSION: COSI released 3Q10 sales results last night; the results were impressive and support our bullish case. 


Cosi same-store sales results came in strong for 3Q with company-owned stores seeing a 205 bp sequential improvement in two-year average trends as comparable sales grew 6.6% in the quarter.  System-wide same-store sales grew 5.2% versus 3Q09.  In early September, I wrote a note titled, "ALL ROADS POINT NORTH", and these results are right in line with that thesis. 




Howard Penney

Managing Director

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What Would Cause Heli Ben to Take QE2 Off The Table?

Conclusion: In analyzing the fine print and market reactions to the latest FOMC minutes, we find potential roadblocks to further easing few and far between. On the flip side, we see that the anticipation of QE2 has grown to a level that opens the door for substantial reporting risk to the downside vs. expectations. In addition, we’ve outlined a mini economic calendar of near-term releases that might surprise meaningfully to the upside or downside, given current market sentiment.


This morning, we got the same question from a couple of our more astute subscribers, asking what would reverse the likelihood of QE2, and perhaps more importantly, market expectations of QE2? The caveat being that this latest melt-up has been fueled by speculation ahead of further easing, so what could erode such speculation, even if just on the margin?


Without doing too much research, we know the quick answer is increased inflation, lower unemployment, and accelerating growth. We are on record stating the latter two of the three options are highly unlikely in the short-to-intermediate term based on our intermediate term forecast(s) for below-consensus GDP growth, negative discretionary spending growth, and declining home values.


Turning back to inflation, we see that Bernanke has turned a blind eye to some of the commodity price headlines of the last several days and weeks. Howard Penney, our U.S. Strategist and Managing Director of Restaurants, pointed a few out in this morning’s Early Look:


(1)   Gold trading at a record high for the second straight day

(2)   Tin trading at a record high

(3)   Cotton at a record high

(4)   Copper at a 27-month high

(5)   Rubber at a 27-month high

(6)   Soybean, Corn and Wheat all approaching 2008 record highs


Since we know Bernanke didn’t see inflation back in 2008 when crude oil was ~$150, for the sake of this analysis, we’re going ignore them alongside the Fed. Digging deeper into their statements, we see that core inflation has trended below the Fed’s target (the latest reading came in at +0.95% YoY in August). Moreover, inflation expectations* have trended below the Fed’s targets as well, which is why they are considering raising the target level of inflation.


We use the asterisk on inflation expectations above because we don’t necessarily agree with their assessment. At best, we’re getting mixed signals from the market: gold at record highs signaling the next hyperinflation vs. yield curve compression signaling disinflation. We leave out TIPS here because the Fed has actually been active in this market, which obviously skews the pricing away from a true market gauge.


To the same extent, the Fed’s actions (or expectations of Fed actions) have caused market participants to front run the Fed by loading up on 10-year treasuries. At yesterday’s auction, 10-year Treasuries yielded 2.475 percent – the lowest since the January 8, 2009 auction! The bid/cover ratio declined slightly, however, to 2.99 from 3.21 in the previous auction. Elsewhere in the Treasury market, we see the spread between 30-year and 10-year Treasuries has widened to a record 138bps, a clear sign of investor demand for medium term Treasuries – the part of the yield curve where QE2 is expected to impact most forcefully.


Elsewhere in the minutes from the September 21st FOMC meeting, we see that expectations also play a key role in deciding when and how forceful to implement further QE2. In light of this, we’ve outlined a mini economic calendar of near-term releases that might surprise meaningfully to the upside or downside, given current market sentiment: 

  • Now through mid-December – 3Q10 corporate earnings season: If JPM’s results were any indication, earnings could continue to disappoint. Monitoring the inflections and deltas within company guidance will be crucial here (as always). Currently, earnings are expected to be reasonably good.
  • October 15th – Bernanke Speaks at the Boston Fed Conference on Monetary Policy in a Low Inflation Environment: Market participants are anticipating further hints of QE2. Likely to not disappoint.
  • October 15th – September CPI, September Retail Sales: CPI may surprise to the upside, given the recent commodity and energy inflation. Despite this, the Fed will be watching for the Core Inflation reading, as always. Apparently U.S. consumers don’t have to eat or drive to work... Given that these costs are going up, Retail Sales ex Food and Energy could disappoint.
  • October 19th – September Housing Starts: Based on Consensus expectations for single-digit housing price declines, any and all housing data could surprise to the downside.
  • October 26th – August Case-Shiller Home Price Index: More so than any other on this list, this release will surprise consensus to the downside, similar to the August 24th Existing Home Sales bomb. The August Case-Shiller data represents contracts signed in April, May, and June – an 8.1% decline from July’s representation.
  • October 29th – 3Q10 GDP: Similar to the Case-Shiller number, this release could shock consensus as well. We forecast a deceleration to +1.3% vs. consensus expectations of an acceleration to +1.9%. The rate of growth will be crucial here, as +1.6% is the line in the sand (2Q10 print).
  • November 1st – October ISM Manufacturing Index: This series has grown increasingly volatile, inflecting twice in the previous four months. Likely to come in in-line with half of investors’ expectations and surprising to the other half.
  • November 2nd – Midterm elections: A Republican rout is priced in and that has been bullish, on the margin, for equities. A Democrat surprise may disappoint current sentiment.
  • November 2nd-3rd – FOMC Meeting: The world’s eyes will be focused here.
  • December 14th – FOMC Meeting: In case they disappointed in November… 

At any rate, it’s clear by all indications that QE2 is getting baked into every market (currency, bond, equity, commodity, etc.). As always, you have to be especially diligent in your risk management when consensus is on one side of the trade. As we stated earlier, QE2 is a near certainty, based on the economic outlook.  If, however, it comes in much lighter than expected, look out. The reflation we’ve seen globally could unwind in a real hurry.


Darius Dale



What Would Cause Heli Ben to Take QE2 Off The Table? - 1


This note was originally published at 8am this morning, October 14, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“As long as the music is playing, you’ve got to get up and dance.  We’re still dancing.”

-Charles O. Prince (Citigroup CEO) July 10th, 2007


If Chuck were in the game today he would be dancing as the S&P finished higher for the fourth straight day while the already-elevated quantitative easing expectations continue to weigh on the dollar (down 1% this morning and -8.5% in 3Q10) and put a bid under the riskiest assets.  It’s just a matter of time before the music stops playing and the consequences of a debased currency are brought to bear on this economy.


If you listen to our morning call, just about once a week Keith says “hope is not an investment process.”  Typically, this phrase is used in response to hopeful rhetoric surrounding the markets.  More and more people seem to disagree with Keith, turning to hope for more QE, more time, more bonuses… Hope is becoming part of some people’s process.


While I try to leave hope out of it, and remain as objective as possible, it is difficult to suppress the hope I have that the market does not step on one of the many landmines that are scattered from New York to Beijing and back again. 


One major landmine in DC is the lack of competence of the Federal Reserve Board and the Administration.  Hopefully Ben Bernanke knows what he is doing, but he is clearly not abiding by the dual mandate of the FED: full employment and price stability.  The unlimited supply of money created by the Fiat Fools can dwarf the limited supply of some commodities.  Thus, the FED policies are inciting increased speculative risk, thereby creating a commodity bubble.  This is what we are seeing occur real time:


(1)   Gold trading at a record high for the second straight day

(2)   Tin trading at a record high

(3)   Cotton at a record high

(4)   Copper at a 27-month high

(5)   Rubber at a 27-month high

(6)   Soybean, Corn and Wheat all approaching 2008 record highs


Inflation is becoming a problem across the globe, as the Serbian central bank is telling us this morning.  With India, Australia and Canada having raised rates this year, some voices in China are also calling for a move in rates to address inflation in their economy.  As one of our clients across the pond pointed out, what if the US and China struck a deal - the Chinese will let the YUAN appreciate in exchange for less QE?  That would certainly put a pin prick in the commodity bubble and the reflation trade!


With the market trading at 12x NTM EPS, hopefully we can keep dancing and get it to 13x.  That would be another 5% from here – easy money which would be handy going into the holidays.  Wall Street and Main Street are not two streets on the same block anymore; they are on different planets.  A cursory glance at the headlines will spell out the increasing gulf between the Haves and the Have Nots in this High-Low Society.  Hoping to be eligible for the food stamps program is very different than hoping for a record bonus.


It is my view that a decoupling from reality has occurred in many areas of the American economy over the past twenty years.  Salaries paid to twenty-something’s to carve up mortgages and sell them were completely unrelated to the actual utility these workers were adding to the economy.  At some point, such disconnects are forced to come back to reality.


The “exorbitant privilege” the United States holds as the world reserve currency holder is clearly being challenged by China, Russia, Germany and most importantly, by the markets.  While it is ingrained in many people’s minds to take for granted that the dollar will always be king, I would much rather be cognizant of two facts.  Firstly, it has not always been the world reserve currency.  Secondly, economically buoyant rivals across the globe are calling for a new system.  Far from playing a hand in bringing us back to reality – the government is doing everything it can to keep the music going in the markets, only further irritating our Client and Chief Creditor and other trade partners.  If that sounds like a bad movie to anyone, you’re not alone.


The financial crisis has played out like a bad movie in many respects and nothing ruins a movie like cheesy quotes.  While this morning’s Early Look quote is about as cheesy as cheesy gets, Chuck certainly contributed his part to the Crisis in Leadership that persists today.  Our process at Hedgeye is not to listen to the self-proclaimed leaders, but rather, focus on what real-time market prices are telling us.  The bull-bear battlefield is becoming a minefield and lines are being drawn around the data points below.




1)      Stimulus tailwinds are now becoming headwinds

2)      Consumer deleveraging - a household sector that is fearful of taking on debt

3)      Declining home prices and the foreclosure fiasco (which got worse last night)

4)      Bankrupt states and dry pension funds - ongoing spending cutbacks at the state and local government levels; these are structural issues that the Fed is not equipped to deal with

5)      Currency wars

6)      Sovereign debt crisis

7)      Slowing earnings growth

8)      Commodity and Energy inflation

9)      No job growth and the employment-to-population ratio of 58.5% that remains stuck near 30-year lows. Over 40% of the unemployed have been so for over six months; 30% for at least a year

10)  Health care reform that has frozen small business hiring

11)  Cash hoarding by banks and corporations alike because of the lingering uncertainty over the economic outlook

12)  Consumer confidence vs. Y/Y PCE growth spread is unsustainable

13)  The yield curve is compressing





1)      The Republicans take over Washington - gridlock prevails

2)      Quantitative easing will be “better than expected.”  Ben does know what he is doing!

3)      Uncle Sam has plenty of crutches to keep propping up consumer spending

4)      Corporate America will print good earnings numbers

5)      M&A cycle reaching pre-crisis level

6)      Corporations are sitting on a $1.6 trillion stash of cash on their balance sheets

7)      There is $2.6 trillion of cash sitting in money market mutual funds

8)      Oh yeah; Dubai is “back”


Risk management is not about going with the crowd.  One thing we are accountable to here at Hedgeye is our process.  Doing something (dancing or making an investment decision) because everyone else is doing it is not our approach.  Bad music is as bad music does and we will continue to ignore the dancers until the DJ puts on our song.


Yesterday, Keith shorted the S&P 500 via the SPY.  As he said yesterday “We watched. We waited. We are now shorting the SP500.”


As the classic Don McLean song goes:


A long, long time ago...
I can still remember
How that music used to make me smile.
And I knew if I had my chance
That I could make those people dance
And, maybe, they’d be happy for a while.


You know the words!


Function in disaster; finish in style


Howard Penney




CONCLUSION - I have reservations about CAKE going into the quarter.


Referring to our restaurant industry SIGMA chart, all restaurant companies want to live in Nirvana; with same-store sales positive and margins growing on a year-over-year basis. 


Not all of the restaurant companies in Nirvana are there for the same reasons; some companies may be lapping easy comparisons, driving comps entirely by pricing or thanks to a temporary, but very favorable, cost environment.  In these cases, such companies will not sustain their positions in the Nirvana quadrant. 


It appears that CAKE may be “moonlighting in Nirvana” and could be particularly vulnerable to sliding to a less favorable position in the second half of 2010 and maybe as early as 3Q10.  CAKE’s same-store sales  could also face pressure going forward due to an average check problem; customers have been trading down to small plate and snack items.  This will likely lessen the positive comp and margin impact of management implementing an effective 1% price increase in August, which will give the company about 1.6% of menu pricing entering 4Q10.  It is important to remember that that the company did not realize its full 1.4% menu price increase during the second quarter because of ongoing check management by guests.  Additionally, CAKE, will not be immune to increased commodity pressure with the company highlighting its expectation for higher dairy and fish costs.  Same-store sales and margin comparisons become decidedly more difficult, for CAKE, in 2H10.


Also, for companies such as CAKE and PFCB with high levels of exposure to California, it looks as if the Golden State may provide a headwind.  California tax receipts growth has slowed by over 21% since 1Q10.  Recent comments from other retailers do not suggest that California is falling off a cliff, but clearly some challenges remain:


Nordstrom- California continues to be below the full-line store average, although Northern California performed above the full-line store average. The gap between California and the full-line store average tightened in the month of September.


Ross Stores- Same-store sales in California, where weather was especially warm during the latter part of the month, increased 1% in September.  Overall comp was 2%.


Costco (CA is their largest market) - “On a ‘relative’ basis LA has shown some strength in the last couple of months and quarters - It went from low to slightly negative comps at its trough in the last year-and-a-half to a very slightly positive.  So again, it is improving, but it is certainly been our toughest region from an operating leverage standpoint.”


Safeway - Question from today's conference call (CA also their largest market): "So I guess looking kind of at the environment in general, competitive environment, I mean, it would seem that some of your competitors, especially in California are struggling and you have definitely heard from one of the mass or the club stores that L.A. seems to be a particularly strong market. I am just wondering if you could comment a little bit on the competitive environment in California and if you are seeing a greater ability to capture share seeing the weakness that some of your competitors are experiencing?


Answer from SWY CEO: "I think that California is a combination of things. It is a combination of I think the second highest unemployment in the country running at 12.6 plus the fact that you've got some competitors that are really struggling, and I think that those two things kind of tend to offset one another. The high unemployment working against you, some of the regional players struggling, actually work in your favor, and I don't think anyone is really expecting the economy to get better any time soon, and so we think it is all about taking business and taking market share which is what our marketing programs are designed to do. To me the price parody is just the price of entry. It is everything else that you do to differentiate yourself that takes market share. And so price parity is very important would have been great if we had had that at the front end of the recession. Would have been great if we all had understood that this was going to be the longest recession in my adult life. But, you know, that’s just the way it is."


CAKE - MOONLIGHTING IN NIRVANA - cake vs ca sales tax



Howard Penney

Managing Director



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