Conclusion: It has been just over two years since the completion of the merger and management appears to finally be on the right track with Wendy’s.


We have learned recently that WEN is going to be testing some new products and advertising that could bring back the Wendy’s of old.


First, next week Wendy’s will be testing some new advertising creative that focuses on Wendy, the company’s namesake.  Yes, senior management is bringing out the daughter of Dave Thomas, the founder of Wendy’s.  The commercials are folksy but it looks like the company may finally be pursuing an advertising strategy that will resonate with core Wendy’s consumers.


Second, management is about to embark on a massive plan to upgrade the menu to enhance the quality of its offerings.  This new menu strategy focuses on introducing new products that compete with some of the more premium products and brands in the QSR segment.  The company is currently testing new “natural cut” French fries that rival the style you get at Five Guys.  Additionally, the company will be rolling out a new hamburger called the “golden burger” which is expected to compete with the quality offered at In-N-Out Burger.  They will also follow up in the coming months with a new chicken sandwich to compete with Chick-fil-A.


Given that Wendy’s is a more premium-priced brand, this menu upgrade initiative should bode well for incremental business.  In fact, in test market where the new “natural cut” fries are being sold, same-store sales are up 8-9%.


As for the quarter, sales trends improved at both concepts, but a 15% increase in beef costs did not help margins in the quarter.


I imagine we will learn more about the new menu and advertising initiatives on the company’s quarterly conference call (WEN is reporting 3Q10 earnings on November 12), but the franchise system appears very enthusiastic about the direction the company is headed.


Now, if they could only get rid of Arby’s…



Howard Penney

Managing Director

Is Argentina Signaling a Cyclical Peak in Emerging Market Asset Values?

“Tops are processes, not points”

-Keith McCullough, CEO of Hedgeye Risk Management


Conclusion: The Argentinean economy has three key issues that will create significant downward pressure on Argentinean asset values once the global yield-chasing parade comes to an end. Those issues are inflation, declining trade revenue, and overly bullish sentiment. Further, we see the recent appreciation in Argentinean asset values as a sign of a cyclical peak in emerging market asset values.


Plain and simple, if you’re looking for high beta shorts (which you likely should be, given the asymmetric global risk setup) Argentina is very attractive on a lot of fronts. We think the overwhelmingly positive sentiment surrounding the Argentinean economy is a yet another sign of yet another “top” in emerging market asset values.


The Argentinean economy, which has been benefited YTD from a number of tailwinds, has three key issues that will create significant downward pressure on Argentinean asset values once the global yield-chasing parade comes to an end. Those issues, which we dive into below, are inflation, declining trade revenue, and overly bullish sentiment.


Inflation IS a Problem


On the inflation front, many Argentinean economists have gone on record to publicly contest the government’s current reported +11.1% YoY inflation rate, suggesting that consumer prices may actuall be growing at more than twice the rate. The most notable pundit is former Argentine central bank president Alfonso Prat-Gay, who’s proprietary methodology suggests inflation may be running at roughly +25% YoY. Moreover, a September 15th survey by Buenos Aires-based Torcuato Di Tella University showed that consumer prices are expected to rise 25% over the next 12 months, which suggests Argentinean consumers may see through the widely-believed-to-be-faulty CPI data (Argentina’s former president, the late Nestor Kirchner changed the staff at the CPI agency in 2007 – a move many believe he made to hide the extent of inflation).


Currently, Argentine President Fernandez de Kirchner is avoiding selling bonds internationally to service debt despite the lowest yields in two years (~8%). Instead, she and central bank President Mercedes Marco del Pont have elected to finance debt service with FX reserves, which have grown to a record $51.3 billion as a result of dollar purchases and strong export growth. YTD, Argentine has spent $5 billion of reserves this year and plans to use an additional $7.5 billion next year to service debt. Never mind that the fact that former central bank president Martin Redrado was fired for refusing to back the plan because of its inflationary potential.


To sterilize recent sales of the peso, the government is issuing short term local debt that pays about 12 to 14% interest. Effectively, the government is taking a loss on the dollars it is buying which yield ~32bps on 2-year U.S. Treasuries. The total supply of Argentinean central bank debt maturing in one month to three years has grown 77.1% since June ’09 to 60.4 billion pesos. We interpret that as Argentina’s liquidity risk just increased by some fraction/multiple of 77.1% in the last 15 months.


Is Argentina Signaling a Cyclical Peak in Emerging Market Asset Values? - 1


Trade Revenue (and Growth) is Setup to Slow


By now, it’s no secret that Argentine is doing well economically as evidenced by the government’s +9% YoY GDP growth projection for 2010 and the S&P’s Sept. 13th upgrade of Argentina’s debt rating one notch to B (five levels below investment grade). The Argentinean economy has certainly benefitted YTD from record export tax revenue (+92% YoY in September) fueled by a record 55 million ton soybean harvest.  Moreover, the Argentine peso is one of few emerging market currencies to decline against the U.S. dollar on a YTD basis – down (-3.9%).


When taken into context of the global commodity reflation we seen over the last few months, we see that the things Argentina is selling (soybeans, oil, corn, wheat, etc.) are all going up in price and, because its currency is depreciating vs. the U.S. dollar, Argentine is receiving incremental dollars on top of price appreciation because of favorable repatriation – a two-pronged tailwind of sorts.


Extremely contrary to consensus belief, we think the cycle is turning negative right here and now, as evidenced by Keith’s decision to go long the U.S. dollar today in our Virtual Portfolio (UUP). To get a sense of what could happen to the prices of Argentina’s top commodity exports see below: 

  • Corn, up 40.2% YTD, has an inverse correlation to the U.S. dollar of 0.91 on a six-month basis;
  • Soybeans, up 18% YTD, has an inverse correlation to the U.S. dollar of 0.90 on a six-month basis;
  • Wheat, up 27.5% YTD, has an inverse correlation to the U.S. dollar of 0.80 on a six-month basis; and
  • Oil, up 6.7% YTD, has an inverse correlation to the U.S. dollar of .75 on a six-month basis. 

Essentially dollar up = Argentinean export revenues down, which will create a drag on Argentinean GDP growth going forward. Similar to company analysis, we callout peak revenue and peak margins on the country level as potential inflection points that are not to be streamlined into future estimates of valuation.


Is Argentina Signaling a Cyclical Peak in Emerging Market Asset Values? - 2


Sentiment is Simply Too Bullish


In our risk management models, whenever bullish/bearish sentiment gets stretched too far in either direction, we take that as a contrarian signal of a market top/bottom. In that regard, we are skeptical of the widespread bullish sentiment among many investors on Argentina. In a recent investor poll by Santander, Argentina recorded the largest positive delta of preferred investment destinations in Latin America, finishing at 36% – up from 3% in July.


Other signs of peak sentiment and trough complacency are abound: 

  • The Argentine peso recorded the largest drop in volatility in emerging market currencies this year (down -20% YTD);
  • The extra yield investors demand to own Argentine bonds instead of U.S. Treasuries narrowed 20bps yesterday to 518 – that spread is down from 846bps on July 1st;
  • Argentine CDS (5Y) has declined -579bps since the end of May and are now at levels not seen since its summer 2008 lows (I don’t need to remind you what happened shortly after that); keep in mind that Argentina is a country that has been in a period of default or restructuring for ~56 of the last 210 years! 

At the end of the day, we understand that the credit market and bond market are pricing in a potential regime change after former president Nestor Kirchner’s death a few weeks ago. While we agree that a regime change would likely be bullish for Argentinean financial markets, the election is nearly a full year away. There is a great deal of risk to manage between now and then.


Darius Dale



Is Argentina Signaling a Cyclical Peak in Emerging Market Asset Values? - 3

Europe’s Shaky Compass

Hedgeye Portfolio: Short EUR-USD via (FXE); Short Italy (EWI)


Conclusion: as the interconnected risk trade in Europe heightens alongside the US Fed’s Quantitative Guessing (QG) decision to pump more dollars into the system, we’re taking the explicit tact to short the EUR versus the USD.  Today’s announcement from the ECB and Bank of England to hold benchmark interest rates at their current levels of 1.00% and 0.50% with no comment to explicitly issue their own QE2 packages, while the region pushes through austerity measures, leaves many questions unanswered, including just how these central banks and global governing bodies may need to act in the very near term given the explosion in risk premiums for Europe’s fiscally imbalanced countries, particularly Greece, Ireland, Portugal, Spain and Italy. As we stated in our Q2 2010 quarterly theme of Sovereign Debt Dichotomy, history shows that kicking the can of debt down the road doesn’t end well. In the case of the Eurozone, countries like Ireland are bearing the brunt of the European Monetary Union’s (EMU) constraints, namely the inability to influence monetary policy to lessen debt obligations and market volatility.


Below we highlight the rising risk trade in Europe and the fundamentals behind our bearish view on Italy:


Trading Europe’s Risk Inflection:


From the recent movement in our Hedgeye Portfolio and our research over the past 10 days, we’ve noted heightening risk for paper across Europe, but particularly for Europe’s fiscally bloated member states. This marked inflection, which we’re measuring via government bond yields and sovereign CDS spreads, has emerged after the month of September and most of October saw risk compress. As the charts below of the 10 YR government bond yields and 5YR CDS spreads demonstrate, risk is blowing out to year-to-date highs (excluding Greece), and therefore we’ve oriented ourselves accordingly!


Europe’s Shaky Compass - mh1


Europe’s Shaky Compass - mh2


Below are some of the major macro moves in our Hedgeye Portfolio over the last few days:



9:57am Covered UUP (US Dollar Index Fund) @22.23



3:26pm Sold USO (US Oil Fund) @ $36.67

3:36pm Shorted FXE (EuroTrust Fund) @ $140.55



10:28am Shorted FXE (EuroTrust Fund) @ $142.10

10:16am Shorted EWI (Italy Index Fund) @ $18.34 (*initially shorted on 9/24/10 @ $16.65)


Explicitly we’re playing Europe’s currency risk on the short side versus a bullish view on the USD from a short-term, mean reversion perspective. We think the USD should gain on the back of a Republican victory of the House and next week’s G20 meeting in Seoul (Nov. 11-12) in which global players will put additional pressure on the US to quell further USD debauchment.  [As a side note, ECB President Trichet said in a press conference today that he is confident the US is not promoting a weak dollar.]


Our quantitative models suggest the EUR-USD is overbought from an immediate term TRADE duration at $1.42, with TRADE support at $1.39. Our intermediate term TREND line of support is at $1.33.


Europe’s Shaky Compass - mh3


Returning to the sovereign debt outlook, Ireland is one country that stands out in the charts above.  The country is currently the region’s debt poster child, with 2010 debt and deficit levels estimated at 10% and 32% of GDP, respectively. Certainly Ireland has “earned” its reputation after pigging out on low interest rates for nearly a decade, resulting in a severe domestic housing bubble and financial crisis, the latter of which is contributing heavily to its 2010 deficit.  While Irish economic ministers have tried to calm investor fears by stating that the country has €20 Billion in cash to fund its debts into April of next year, as the government plans to push through spending cuts and tax hikes worth €6 Billion next year, the market is telling a different story--one of desperation.


We’re of the opinion that Ireland, like Greece, presents risks that could snowball beyond their individual borders.  We have not actively taken a position in Greece or Ireland, due to this volatility, however it’s interesting to note that Greece’s bond yields and CDS spreads exploded exponentially over just a few days, which ultimately led Eurozone finance ministers to issue a €110 Billion bailout package for Greece on May 2nd and days later, along with the IMF and World Bank, a €750 Billion package to rescue troubled European nations. 


Could Ireland be the next Greece?  Certainly the data is pointing in that direction.




Italy’s Headwinds


We shorted Italy again today via the etf EWI in the Hedgeye Portfolio, and while our short position is working against us, the fundamentals continue to suggest further economic downside over the intermediate to longer term. We’ve identified three main headwinds:

  1. Exorbitant debt levels and the magnitude of near-term maturities
  2. Berlusconi’s divided government
  3. Aging population

Debt Doldrums


With a debt ratio at 115.2% as of fiscal year 2009, Italy’s debt is of particular concern to us, while its deficit as a percentage of GDP is less worrisome at -5.3%, yet nevertheless above the -3% target rate set by the EMU.


Europe’s Shaky Compass - mh4


Below we’ve compared the country’s government debt obligations over the next three years. What’s interesting to note is that Italy has a massive obligation over the period, especially next year at €266.6 Billion alone, and its obligations rival those of Germany and France, countries with far larger economies. (Germany’s GDP is ~ 1.6x Italy’s).


Europe’s Shaky Compass - mh5


If we look at debt maturing over the period as a percent of projected GDP, we find that the PIIGS have a significantly larger share to pay off than their fiscally prudent brothers, especially Germany. While this isn’t a huge surprise, it reinforces the point that countries that want to issue or refinance debt will have to do so in a period of higher costs of capital as yields rise (in some cases to record highs!), which should increase and/or accelerate sovereign default risk. 


Europe’s Shaky Compass - mh6


Berlusconi’s Divide


With regard to Italy we question the country’s ability to materially cut its bloated balance sheet, particularly given the increasingly contentious political backdrop. Remember that back in July PM Silvio Berlusconi expelled his speaker of the Parliament, Gianfranco Fini, and other dissents from his People of the Liberty party, which left his party with a majority coalition.


However, Fini has been increasingly critical of Berlusconi, and rightfully so for Berlusconi continues to make scandalous headlines. The latest scandal concerns his involvement in the release of a teenage belly dancer accused of theft in May.


We view the uncertainty in the government as bearish on the margin.  We’ll have our eye on Fini who has found support in both Houses of Parliament and could play an integral role over the next weeks in bringing down Berlusconi’s government.


Aging Population


We’ll let the chart below do the talking, but Italy’s aging population must be considered in making an investment position, for it will be a further drag on the social state. The data suggests that in 2015, 21.9% of Italy’s population will be >65, the highest of the Eurozone countries. Moving out to 2020, Italy’s percentage moves to 23.2%, the highest rate of any member country, with Finland and Germany trailing at 22.8% and 22.6% respectively.


Europe’s Shaky Compass - mh7


Stay tuned as the Macro Team digests the daily interconnected risk.


Matthew Hedrick

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Bernanke's Brush Fires

This note was originally published at 8am this morning, November 04, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"It does not require a majority to prevail, but rather an irate, tireless minority keen to set brush fires in people's minds."
-Samuel Adams


While I don’t expect any professional politician in Washington or the manic media that gets paid advertising dollars for stock market cheerleading to call this out for what it is until this stock market is a lot lower, I will. The US Federal Reserve is officially and unequivocally politicized.


Yes, Ben Bernanke himself has admitted that Quantitative Guessing (QG) is “unconventional.” But now he is so politicized that he is compelled to write an Op-Ed for the Washington Post on “What The Fed Did And Why: Supporting The Recovery And Sustaining Price Stability.” The Chinese, Hedgeye, and anyone with real-time market quotes, are sitting here staring at their screens this morning with shock and awe.


The US Dollar is making new lows this morning (down -15% since June!). The modern day Roman Empire’s credibility is burning at the global stake.


Notwithstanding unprecedented timing of the Op-ed (on the day of the Fed’s decision – do you think anyone leaked its contents?), or the fact that the words “US DOLLAR” were not mentioned ONCE in his allegedly objective and politically unbiased analysis, allow me to break down Bernanke’s view for you versus reality:


1.  STORYTELLING PREFACE: “Two years have passed since the worst financial crisis since the 1930s…”


KM: That’s always the 1st sentence of the fear-mongering message campaign that will lead you to believe no one notices Wall Street’s 2010 bonus pool.


2.  OUTCOME: “These steps helped end the economic free fall and set the stage for a resumption of economic growth in mid-2009…”


KM: Of course, the professional politicians saved us from the crisis they helped create and now we should pay homage to the banks, never earning a rate of return on our hard earned savings again. Fiscal sobriety and conservatism be damned. Get out there and chase some yield folks.


3.  MANDATE: “Notwithstanding the progress that has been made…” (we saved you)… “the Federal Reserve’s objectives – its dual mandate, set by Congress – are to promote a high level of employment and low, stable inflation…”


KM: Right, you saved us from the evil-doers and completely screwed up the employment picture by fear-mongering employers to stop hiring. Ok. And now we’re seeing the credibility of the US Dollar collapse and, as a result, global commodity prices hit new YTD highs, DAILY. The CRB Commodities index is up +16.4% since Bernanke’s decision to Burn the Buck on August 27th in Jackson Hole.


4.  INFLATION: “Although inflation is generally good, inflation that is too low… can morph into deflation…”


KM: Right, right. China, India, and Australia have raised interest rates in the last few weeks specifically because they (like anyone with real-time quotes) see the inflation implied in expectations. The US Treasury Inflation Protection (TIP) auction yielded -0.55% (lowest EVER) in October (implying outright fear of inflation), but Bernanke keeps Burning the Brush Fire of Fear-Mongering about a great depression that no one in finance has remotely experienced.


5.  ECONOMIC STAGNATION: “falling prices and wages, which can contributed to long periods of economic stagnation.”


KM: How about JOBLESS STAGFLATION (sorry PIMCO, we called it first) = US Government sponsored fear-mongering towards employers + inflation. In the 1970s, Jimmy Carter and the Fed’s panderer, Arthur Burns, didn’t get it. This time around, I don’t expect Obama and Bernanke to either. It’s Keynesian theory versus real-time market realities. The problem here isn’t US Consumer reaction to government policy. It’s government policy itself.


6.  QE2: “so far looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action… lower mortgages will make housing more affordable … and higher stock prices will boost consumer wealth …”


KM: This is the central narrative fallacy of the Bernanke Brush Fire that really lights up the anxieties of anyone observing growth and inflation data on a globally interconnected basis. Re-read what he’s implying here and your jaw should drop:


A)     US Dollar Debauchery – Let’s ignore that chart.

B)     Inflation – I’m willfully blind to that chart too and/or whatever any other major country is currently saying on the matter.

C)     Stock Market – I fundamentally believe that manipulating its price via investor expectation is what drives this economy.

D)     Mortgages – I’m not going to mention that 30-year yields have gone straight UP +65% (from 3.55% to 4.09%) since I moved to QE2 in August.


7.  CONFIDENCE: “we are confident that we have the tools to unwind these policies at the appropriate time…”


KM: What a joke. While virtually every central banker in the world (ex the Fiat Fools in Japan and the EU) have hiked interest rates multiple times since the mid-2009 recovery that Bernanke pats himself on the back for, I can assure you that if he couldn’t raise rates with 6% US GDP growth, he’ll likely never be able to “unwind these policies” at any time. Sadly, the global markets may very well do that for him. And that will be it for this QG experiment going bad.


Don’t take my word for it on all of this. I’m just a man who is selling everything and going to cash. Get some real quotes and study the history of countries who attempted to debauch the currency of their citizenry. Then read some Asian newspapers - or something other than the Washington Post.


Overnight, China’s central bank adviser, Xia Bin, said the Fed’s Quantitative Guessing “amounts to uncontrolled money printing.” Even Japan’s bureaucrat PM, Naoto Kan, said this was “the US pursuing weak-dollar policy.” At least those Op-Eds were short and to the point. They also sound just about right.


My immediate term support and resistance levels for the SP500 are now 1186 and 1201, respectively. My SP500 short position (SPY) is -0.96% against me in the Hedgeye Portfolio, and I intend on shorting the market again today on strength. Being early on the short side here is also called being wrong. I get that. I was early in October/November of 2007 too. Remember, market tops are processes, not points.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bernanke's Brush Fires - bern

Natural Gas Inventory Climbs Higher

Conclusion:   Consistent with our thesis of oversupply of natural gas, inventory in the U.S. continues to build.  We tactically covered our short natural gas position on November 1st, but continue to have bearish view on Natty.


Consistent with our thesis, as articulated by Energy Sector Head Lou Gagliardi, natural gas inventory in the United States continues to build due to a mismatch of supply and demand.  According the Energy Information Administration, natural gas inventories grew by 67 billion cubic feet for the week ended October 29th. This was slightly more than analyst expectations, which looked for a build of between 61 and 65 billion cubic feet.


As we’ve highlighted in the chart below, supplies in the United States are now about 10% higher than their 10-year average and up about 1% year-over-year. Interestingly, according to the EIA, inventory in the producing regions, which includes Alabama, Arkansas, Kansas, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas, was up 2.4% and is now 20% above the 5-year average. This data point clearly underscores our view that producers are overproducing.


Furthermore, the EIA provided the following comment today as it related to supply and demand balance:


Though supply still exceeded demand during the Thursday-to-Wednesday report week (October 28-Nov 3) as reported by BENTEK, the supply/demand balance continued to tighten as demand rose while supply stayed flat. Total supply rose less than one half of one percent during the report week, as production and liquefied natural gas (LNG) sendout rose slightly. Overall, Canadian pipeline imports fell by an estimated 2 percent, but declines in imports to the West and Midwest were partially offset by a 17-percent increase in imports to the Northeast. Total consumption rose 7 percent, bolstered by a 30-percent increase in residential and commercial consumption, and partially offset by a 9-percent decline in consumption of natural gas for electric power generation. Compared to last year, total consumption is 2 percent higher and total supply is 6 percent higher.”


The two key takeaways from this statement for us are that electrical consumption is down 9%, which likely indicates soft economic activity, and the continued imbalance of consumption growth (2%) and supply growth (6%).


Additionally, the outlook for production in the United States continues to suggest further growth based on rig count acceleration.  Currently, there are 1,672 rigs working in the United States, which is 600 more year-over-year.   While there is more rig activity chasing liquids (oil), according to Baker Hughes almost 58% of the operating rigs focus on natural gas and almost 57% of those rigs are horizontal. 


More rigs and more horizontal drilling means more supply.  It is that simple.


Daryl G. Jones

Managing Director


Natural Gas Inventory Climbs Higher - nat gas inventory chart

Bear/Bull Battle: SP500 Levels, Refreshed



Being short the SP500 today would make me wrong. I get it. I’m not going to point fingers or make excuses. The screen tells the score. Ben Bernanke has beaten me today.


I’m not always sure how it feels on the days preceding crashes, but today definitely feels as different as a few days did in late 2007. Not only from a price, volume, and volatility perspective, but in that dangerous place that we market practitioners call our gut. Any move beyond the 1215 line in the SP500 equates to a 3.3 standard deviation move on my key immediate term TRADE duration. These happen very infrequently. Someone might be blowing up.


I’ll leave getting today wrong for those who want to be focused on yesterday’s mistakes. Right here and right now our immediate term risk management task is to manage toward the risk that will be in this market tomorrow. In the chart below, we have outlined the immediate term TRADE risk to the downside at -3.5% (1173). Could it all happen in a day? For sure. I wouldn’t call it more than a 1.7 standard deviation move, which is normal – put it that way.


I’ve moved to 70% Cash in the Hedgeye Asset Allocation Model. However painful, tops are processes, not points.



Keith R. McCullough
Chief Executive Officer


Bear/Bull Battle: SP500 Levels, Refreshed - 1

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%