Conclusion: October’s employment data from the BLS shows a growth in the employment level for 20-24 year olds for the third consecutive months.  This is incrementally positive for QSR stocks. 


Unemployment data released this morning by the Bureau of Labor Statistics were again positive for Quick Service restaurant stocks. Management teams in quick service and casual dining have been citing unemployment levels, particularly among younger age cohorts, as a particularly strong headwind for the restaurant industry. 


The most recent data from the BLS, for October, reveals that 20-24 year olds saw a year-over-year uptick in employment levels for the third consecutive month.  The improvement seen in August was the first since September 2007.  As the chart below clearly shows, the improvement in employment levels for 20-24 year olds appears to be growing at an increasing rate. 


EMPLOYMENT DATA POSITIVE AGAIN FOR QSR - unemployment by age black


Howard Penney

Managing Director


This note was originally published at 8am this morning, November 05, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Oh, Andy loved geology. I imagine it appealed to his meticulous nature. An ice age here, million years of mountain building there. Geology is the study of pressure and time. That's all it takes really, pressure, and time.”

-Red, The Shawshank Redemption


On a daily basis, we grind through a constant channel of noise.  E-mails, instant messages, text messages, Bloomberg messages, and phone calls all can interrupt our train of thought.  Generating valuable investment ideas for our clients in real-time requires pressure (effort) and time (focus) so at Hedgeye we value the time we take away from the various stimuli that surround us for so much of the day so that we can share ideas across sectors, discuss ideas with clients, or simply think in solitude.  As Keith referenced in his Early Look titled, “AMERICAN SOLITUDE” last week, solitude and leadership often go hand-in-hand. 


That said, I think I can speak for everyone at the firm when I state that the unique nature of our business model offers valuable dialogue channels with our clients.  The nature of that dialogue can vary broadly, agree or disagree, angry or calm, data based or pure qualitative opinion.  The fact is, all of it is critical to our process and all of it is appreciated. 


Besides the wide array of views we receive from our exclusive network, the disparate perspectives of our readers are also a key differentiator for our firm.  We hear from people managing billions and we hear from people managing a few thousand from their bedroom. 


While I am sensitive to the trust our clients have in us, I think it is important to highlight one of the more powerful thoughts that have come across our screens lately:


“What is the relatively small retirement investor to do?  He is long stocks--that is what has been taught to him over 80 years.  He is long on American patriotism and innovation.  He is disgusted with American politics.  He is naive on currencies, trade, global economics and the bigger picture.  He has income investments that he needs to pay the bills.  He lives in fear of the next bubble bursting.”


The reason why I think this thought is powerful is that it highlights a lot of the ideological dogmas that shackle people’s investment perspectives.  That is not a criticism, and I am not claiming to be immune to the influence of emotion or groupthink.  The best one can do is to be aware of it.  The above thought highlights several handcuffs that need to be removed in order to hold as dispassionate and lucid a view of the markets as possible. 


1)      American Patriotism, while admirable, should not be confused with American Delusion.  I love my country (Ireland) as much as the next man.  Thinking critically, especially about government and the path of the country, is a necessary feature of a democracy.

2)      American innovation is not what it used to be.  Some in the media may pine for the days when auto stocks used to “double and double” as soon as “they get going”, but this theme doesn’t sit well with our data-based conviction that Jobless Stagflation (inflation accelerating, growth decelerating) is here to stay.

3)      Currencies, trade, global economics and the bigger picture are all part of the same patient that we examine each day.  Interconnected markets are here to stay.  We strive to fully respect that fact in the positions we hold in the Hedgeye Virtual Portfolio; we are short the Euro and long the Dollar, while being short the S&P 500.


The last sentence of our client’s message is powerful.  Living in fear of the next bubble bursting is certainly a powerful engine driving market sentiment.  Whether it’s the “relatively small retirement investor” that “needs to pay the bills” or the banker that wants to get paid at year end, fear is a very persuasive mechanism.  In the end, we are as grateful to hear the perspectives of our individual investors as we are to hear the views of our most successful PM’s. 


In Ben Bernanke’s op-ed in the Washington Post, published yesterday morning, he writes that the dual mandate of helping promote increased employment and sustain price stability compelled the FOMC to announce its intention to buy an additional $600 billion of longer-term Treasury securities by mid-2011. 


The introduction to his piece refers to the actions taken by the Federal Reserve and other governments to “stabilize” the crisis in 2008 with a clear aim of claiming legitimacy for further quantitative easing in 2010.  In that same vein, I would refer to the uselessness of past forecasts by government employees like Bernanke and Christina Romer, former chairwoman of President Obama’s Council of Economic Advisers (remember the prediction of 8% being the “peak” of unemployment?).  When Keith coined the term Quantitative Guessing, he was not being flippant; these people do not – and cannot be expected to – offer anything more than guesswork in their economic forecasts. 


What does not involve guesswork is the monitoring of real-time market prices.  The impact of QE2 on the markets is clear to see in the data.  As the dollar has declined, oil, gold, corn, cotton and many other commodities have seen parabolic moves to the upside.  The jobless claims numbers yesterday underscore the dire circumstances that America’s unemployed find themselves in.  The actions of the Federal Reserve are not even close to meeting the expectations that the government set.  With respect to the “dual mandate” of the Federal Reserve, it is failing on both counts.  The consumer is experiencing inflation and job growth has been rather disappointing.


An intuition exists among the American public that I am convinced is lost on many inside the beltway in Washington.  The 401(k) is a significant depository of wealth for the American people so the fear of the “relatively small retirement investor” is understandable.  That investor can see and hear the realities of the economic situation.  The realities of the economy are all around for us to see - 43 million people on foods stamps and growing; a foreclosure crisis that shows no signs of abating and will likely get worse before it gets better.  Investing under a cloud of fear of the bubble bursting is exactly the kind of position we do not want our clients to be in.  In the end, all it will really take for the “Bernanke Bubble” to burst is pressure and time


In The Shawshank Redemption, the result of Andy Dufresne’s meticulous application of pressure and time resulted in him burrowing out of a prison over a twenty year period using only a small rock hammer.  As those of you who have seen the movie will remember, the prison warden was shocked to say the least.  Pressure, sustained by time, can work both ways.  In 2010 America, the pressure is being provided by a broken political system, government-sponsored inflation, and a merciless devaluing of the dollar.  All else that is required is time.


One thing is for sure, we will not be complacent.  The last thing we want to do is look like the warden of Shawshank when he realized what had become of Andy Dufresne.  As you can see in the chart below, the VIX Index has traded below its 15 year average.  Being bearish at this point is not consensus and we are down 2.18% on our short position in the S&P 500.  Yesterday’s move was significant but our conviction has not wavered that the largely policy-induced pressure building inside the market is reaching a critical point.


Time is ticking and pressure is growing.


Have a great weekend,

Rory Green



The Week Ahead

The Economic Data calendar for the week of the 8th of November through the 12th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2

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Buck Breakout? US Dollar Levels, Refreshed

POSITION: Long US Dollar (UUP), Short Euro (FXE)


If you are in this game for real, you will get run-over. I did for three days this week. Lessons were learned.


Three days, fortunately, does not a career in risk management make. The best you can do after you get yard-saled at center ice is to pick up your teeth, go back to the bench, and get ready for the next shift.


We did that yesterday. We shorted the Euro and bought the US Dollar Index. Yes, these are immediate term TRADE calls. But, remember, all TRENDS start as TRADES. It’s the job of the macro story teller to outline why the direction of price momentum can continue.


Dollar DOWN and Euro UP – are you kidding me?




Don’t forget that only 7 months ago, when the Street was parroting their “Euro Parity” call, we went the other way. Currencies are baskets of one another. The US Dollar can go up if the Euro starts going down – sometimes it’s that simple.


Why could the Euro go down? Well, re-print any Euro “parity” sellside research that’s 6 months old and you’ll have plenty of reasons – it’s all associated with sovereign debt default risk and, as of the last few weeks, European CDS and sovereign yields (selectively) are at a bare minimum flashing amber lights.


How about Euro PIIGS printing moneys? QE-EU? Part Deux? Every central Fiat Fool for dem-self, eh.


The other 3 reasons why the US Dollar could continue higher in the immediate term are: 

  1. Mean Reversion
  2. G-20 meetings in Korea next week
  3. Obama on a 10 day roady w/ Asians who are right p.o’d 

Oh, and dare I mention that little critter that’s ruined pretty much every emerging market at some point in human history – inflation. That’s a catalyst too.


The immediate term TRADE support line for the US Dollar Index is in the chart below (right where we bought it yesterday). Immediate term TRADE resistance is up at $77.08. In other words, the USD could easily put on a +2.2% mean reversion TRADE to the upside and nothing will have changed the quantitative setup.


A breakout above $77.08 puts the $80.46 range in play. If you were to only ask Mr. 10 and Mrs. 30 year US Treasury Yield what they think about that, they’d agree. Like the “parity” call of 6 months ago, let the storytelling about how Bernanke will never allow the currency of the American citizenry to survive begin.


Macro musings from a man who is nursing his black eye, but with all 10 of his bare knuckles intact,



Keith R. McCullough
Chief Executive Officer


Buck Breakout? US Dollar Levels, Refreshed - USD index 6 months


Conclusion: We at Hedgeye aren’t alone in our stance that the Fed’s Quantitative Guessing won’t end well. Several important countries and figureheads have joined in the anti-QE parade and we feel that this, combined with other factors is bullish for the U.S. Dollar – and bearish for [nearly] everything else.


Position: Long the U.S. Dollar (UUP); Short the S&P 500 (SPY); Short the Russell 2000 (IWM); Short Emerging Market Equities (FFDs);


On our Morning Macro Call (email if you are an institutional client and need a live dial-in code), Keith identified three catalysts that are potentially bullish for the U.S. dollar in the near term, which could potentially trigger a 6-9% compressed correction in U.S. equity markets. Those catalysts are: 

  1. Obama’s trip to Asia (starting now for the next ten days): Simply put, Asia is peeved with U.S. monetary policy. Central bankers from China, Japan, Hong Kong, Korea, and India are calling out U.S. monetary policy for what it is – “uncontrolled money printing” and pursuant of a weak dollar. Further, most of these nations are continuing to take measures to counter the inflation Bernanke’s printing press is creating in their countries. Obama will have to answer some tough questions and his rhetoric could prove dollar bullish if he attempts to pander to his Asian counterparts.
  2. October Global Inflation Data (now-month end): We’ve seen countries from China to India to Australia to Sweden raise rates in the last two weeks. Simply judging by the performance of the CRB Index during October, there is further tightening on the horizon. Global hiking could, on the margin, drag U.S. Treasury yields higher and the U.S. dollar with it. To some extent, we’re starting to see that occur on the long end of the curve (see chart below).
  3. G20 Summit in Seoul (Nov. 11-12): Tim Giethner might wind up playing a game of one-versus-nineteen on U.S. dollar policy. For a glimpse of what might come, see commentary out of Brazil’s Finance Minister Guido Mantega on the effectiveness of QE: “It doesn’t work to throw money from a helicopter because this won’t make growth flourish”. Germany’s Minister of Finance, Wolfgang Schauble said Thursday, "I don't think that the Americans are going to solve their problems with [QE2], and I believe that it is going to create extra problems for the world”. Timmy’s got some explaining to do come next Thursday. 



On another note, it seems everyone is bearish on the U.S. dollar and bullish on commodities and global equities, including Franklin Templeton’s Mark Mobius. More signs that dollar bearishness are at its peak are: 

  • Belarus is going to become the first country outside Russia to issue debt in rubles to borrow at cheaper rates than U.S. dollars. Countries tend to want to borrow money in currencies they think are going to depreciate, so yields on dollar bonds have gotten too expensive for Belarus. The same is happening to Chinese companies, who are seeking cheaper dollar bond rates by borrowing in Hong Kong vs. mainland China.
  • RBC said the Argentine peso (per U.S. dollar) was the most “attractive currency in the universe they watch”.
  • Turn on CNBC and listen to pundit-after-pundit tell you how QE2 will crush the dollar. For their collective references, the U.S. dollar index is down roughly (-8%) since Bernanke tipped his hand in Jackson Hole, which is a substantial move for the U.S. dollar in a short period of time. 

Clearly, we were early and right calling the accelerated decline in the dollar starting this summer, but evidence is continuing to mount that a weak dollar is solidly consensus. President Obama and his cabinet will see mounting pressure over the next two weeks to adjust their policy towards the dollar as they travel abroad.  Longer term, it is not in their best interests to ignite a currency war, so we would expect their rhetoric to adjust accordingly and be supportive of a stronger dollar policy.


Have a great weekend,


Darius Dale


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