It’s gotten colder out and frappes and smoothies are slowing down considerably.  The hot lattes are not making up the difference.  McRib was a social media darling but it did not move the needle that much.


McDonald’s is scheduled to report its November sales numbers before the market open on Wednesday, December 8th.  November had one less Sunday, and one additional Tuesday, than November 2009.  Based on this, it seems possible that there may be a negative sales shift. 


Consensus estimates are calling for comparable store sales numbers in line in the U.S., slowing down in Europe, and slightly positive sequentially in APMEA.  On a relative basis, MCD continues to out-gun the competition.  However, I am seeing a slight slowdown in sales trends for MCD and I believe that consensus may be overly optimistic for November. 


To recall, October comparable restaurant sales numbers from McDonalds indicated a slowdown in the U.S. region based on two-year average trends.  For comparison purposes, I have adjusted for calendar and trading day impacts.  Europe and APMEA both slowed in October following strong results in September on a two-year average basis.  In November, Europe and APMEA need to print strong headline comparable restaurant sales numbers to maintain two-year average trends.


U.S. – facing an easy -0.6% compare (including a calendar shift which impacted results by -0.9% to -1.7%, varying by area of the world): As of today, consensus is forecasting a print of 5.1% for McDonalds U.S. region comparable store sales in November. 


GOOD:  A print of more than 4% would be perceived as a good result as it would imply that the company improved two-year average trends by 50 basis points or more.  While this would not bring trends back to the lofty levels seen in the summer months, it is perhaps unrealistic to expect a repeat of those numbers in the absence of hot weather-induced beverage and smoothie sales. 


NEUTRAL:  Roughly 3% to 4% implies two-year average trends that are approximately flat versus trends seen in October.  Of course, this would indicate that two-year average comparable restaurant sales were significantly below summer levels.  The summer sales of frappes and smoothies are well and truly behind the company as winter sets in.


BAD:  Below 3% would indicate a further decline in two-year average trends in MCD’s U.S. business from October’s

significant decline.  It would also imply the lowest comparable restaurant sales number since February. 


MCD – NOVEMBER SALES PREVIEW - mcd chart sales preview



Europe – facing an easy +2.5% compare (including a calendar shift which impacted results by -0.9% to -1.7%, varying by area of the world):  As of today, the consensus estimate is for Europe to post +4.9% comparable restaurant sales growth. 


GOOD:  A print of roughly 7.5% or higher would imply two-year average trends slightly below or above the two year average trends seen in October.  October was a strong month in Europe for MCD but a significantly higher print will be required to maintain two-year average trends.  A 7.5% number would be the strongest result since May 2009. 


NEUTRAL: A result of 5.5% to 7.5% would imply that sequential trends had decelerated by up to approximately 100 basis points.  5.5% is still a relatively high level; in fact, it exceeds all months’ results year to date except for March, May and October.  Offsetting that positive aspect is the fact that two-year trends would slow sharply.  In addition, a relatively high number is to be expected against a poor 2.5% print for November 2009.


BAD: Less than 5.5% would imply a deceleration of more than 100 basis points in two-year average trends from October.  Furthermore, two-year average trends would fall below 5%, which, with the exception of August, has not happened since February 2010.    



APMEA – facing an easy -1.0% compare (including a calendar shift which impacted results by -0.9% to -1.7%, varying by area of the world):  As of today, the consensus estimate is for APMEA to post +6.4% in same-store sales growth. 


GOOD: Roughly 9% or higher would imply a steady-to-slight acceleration from the results seen in October.  October saw a significant slowdown in MCD’s APMEA business on a two-year average comparable restaurant sales basis.  A lofty headline print is likely given the weak result of a year ago.  The two-year trend implied by this print will be important to watch.   


NEUTRAL: Between 8% and 9% would imply two-year average trends slightly lower than those seen in October. 


BAD:  Below 8% would imply a significant slowdown from the two-year average trend in October and a return to the level of two-year average trends seen in June, which was a lackluster month for MCD APMEA.


Howard Penney

Managing Director


A 20% Drop In Home Prices Will Feel Like a Punch In The Face


TODAY’S S&P 500 SET-UP - December 7, 2010


As we look at today’s set up for the S&P 500, the range is 35 points or -1.89% downside to 1200 and 0.97% upside to 1235. 

  • Obama, GOP reach a deal on taxes by extending the Bush tax cuts for two years
  • emerging market demand, Barron’s said
  • AGL Resources, (AGL) and NICOR to combine in $8.6B transaction
  •  FT writes that oil is forecast to pass its current two-year high above $90 a barrel to beyond $100 – this would hinder economic recovery
  • Barron’s reports that an Irish tax hike could hurt some U.S. software stocks.  ADBE, VMW, MENT, MFE, SYMC and others are mentioned in the report
  • William Conway said that Carlyle is gearing up for an IPO to boost buyout-fund capital, according to Bloomberg
  • WikiLeaks founder, Julian Assange, was arrested in London


  • One day: Dow (0.17%), S&P (0.13%), Nasdaq +0.13%, Russell +0.59%
  • Month-to-date: Dow +3.24%, S&P +3.61%, Nasdaq +3.87%, Russell +4.66%
  • Quarter-to-date: Dow +5.32%, S&P +7.18%, Nasdaq +9.55%, Russell +12.53%
  • Year-to-date: Dow +8.96%, S&P +9.69%, Nasdaq +14.36%, Russell +21.66%
  • Sector Performance: Energy +0.26%, Tech +0.07%, Materials +0.02%, Consumer Discretionary (0.01%), Telecom (0.03%), Industrials (0.18%), Financials (0.22%), Consumer Staples (0.27%), Utilities (0.47%), and Healthcare (0.68%)


  • ADVANCE/DECLINE LINE: -42 (-770)  
  • VOLUME: NYSE 803.64 (-11.38%)
  • VIX:  18.02-7.12% YTD PERFORMANCE: -16.90%
  • SPX PUT/CALL RATIO: 1.32 from 1.31 +0.37%


  • TED SPREAD: 17.77 -0.102 (-0.569%)
  • 3-MONTH T-BILL YIELD: 0.15% +0.01%  
  • YIELD CURVE: 2.53 from 2.54


  • CRB: 317.29 +0.360%
  • Oil: 88.92 -0.30%
  • COPPER: 400.65 +0.19%
  • GOLD: 1,414.90 +0.61%


  • EURO: 1.3297 -0.87%
  • DOLLAR: 79.638 +0.33%




  • Europe is trading up at the moment.  News of the Bush-era tax cuts being extended is trumping sovereign debt concerns for now
  • Irish budget vote takes place tomorrow.  Passage of the vote is a requirement of the EU bailout
  • Troubles continuing across the broader Eurozone  but Merkel holding firm and rejecting the proposals for a bigger fund and Europe-wide bonds
  • Tesco increased 2.2% as the retailer said that 3Q sales rose 8.8%, led by growth outside of the U.K. 
  • Unilever also gained on an upgrade
  • U.K. Factory Production grew more than forecast in October.  Output rose 0.6% from September.  This was the strongest growth for seven months.
  • Russia moved closer to WTO membership after signing an MOU with the EU that set the terms to resolve all EU-Russia bilateral issues. 


  • Markets ended mostly higher today following Obama extending the Bush tax cuts and Ireland prepared for a budget vote
    • China Shanghai A Share finished up +0.65%
    • Korea KOSPI 100 finished up +0.55%
    • Japan Nikkei 225 finished down -0.26%
  • Japanese stocks declined on fears that the yen will resume strengthening and hurt exports
  • Australia left the cash rate unchanged at 4.75%, market gained +0.77%
  • Bloomberg reports that speculation is mounting that China may raise rates this weekend

Howard Penney

Managing Director


THE DAILY OUTLOOK - levels and trends 127


THE DAILY OUTLOOK - S P levels 12.7










THE DAILY OUTLOOK - copper12.7

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“Everyone has a plan 'till they get punched in the mouth.”
- Mike Tyson


There have been a lot of interesting Mike Tyson quotes over the years, some fit for print, others less so, but this one seems apropos for the times. The Fed tells us they have a plan, and they’re implementing it. So far, the markets seem to like it. Let’s see how their plan fares once they get punched in the mouth.


This summer we introduced our bearish thesis on housing with our 100-page report entitled: “How Low Will Housing Go in 2H10 and 2011”. In that report we laid out our three separate home price models: our supply model, our demand model, and our combination supply & demand model. The output of those models forecast home price declines ranging from high single digits to 20%+ over the next 12-18 months. How have we fared so far? As the chart at the end of this note shows, the four major home price series that we track (Case-Shiller 20 City, Corelogic, FHFA, and Existing Home Sales Median Home Price) are all heading south. After peaking in the April/May timeframe on the strength of the tax credit, three out of four home price series are now solidly in negative year-over-year territory. The lone holdout, Case-Shiller, is a 3-month rolling average, which is why it lags the other series in reflecting the degree of slowdown. The next few months of Case-Shiller data will show a comparable negative trend.


For reference, the Corelogic series is the series now used by the Federal Reserve. How has the Fed’s preferred series fared? According to Corelogic, home prices have rolled from being up +4.3% YoY in May 2010 to being down -2.8% YoY in September 2010, a negative -7.1% swing in four months. Looking month-over-month, the Corelogic series was down -1.8% sequentially in September (the most recent data available), which translates to the fastest rate of decline since February 2009.


The supply and demand imbalances were at the root of our housing call this past summer and nothing has changed on that front. The market is more dislocated today than it was when we made the call in the summer. At the time we made our call in June there were 3.99 million homes on the market for sale and existing home sales were running at a rate of 5.37 million, which equated to 8.9 months of supply. Today, there are 3.86 million home on the market for sale (October), while existing home sales are running at a rate of 4.43 million, which equates to 10.5 months of supply. Existing home inventory peaked at 12.5 months of supply in July. Based on our conclusion that home prices take one year to fully respond to supply and demand imbalances, we would expect to see July 2011 be the low watermark for year-over-year price trends in housing. The more important takeaway, however, is that between now and July 2011 the trends should continue to get worse. While it is possible that the market’s “bad news is good news” mentality will persist and ongoing weakening in home prices will simply translate into greater and greater expectations for further quantitative easing, we continue to think that bad news is simply bad.


Another point to consider is the impact QE2 is having on the housing market. While recent demand statistics have been modestly upbeat (i.e. October pending home sales up 10.4% month-over-month), the reality is that mortgage rates have backed up sharply in November. The Bankrate 30-year conforming mortgage index has ballooned from 4.20% a month ago to 4.70% yesterday. For reference, a 50 bp backup in 30-year rates has a 5% negative effect on affordability.


It’s also worth pointing out that no amount of stimulus or quantitative easing seems to increase banks’ willingness to underwrite residential mortgage loans. In the most recent Senior Loan Officer Survey released November 8, the net percentage of lenders tightening access to prime mortgage credit rose to +9.3% from -5.5% quarter over quarter meaning that the average American is now finding it more difficult to get a mortgage than they were over the summer. The trend was similar for access to nontraditional mortgage credit: +9.5% of respondents reported tightening standards, up from +4.5% last quarter. This isn’t helped by the fact that banks are currently engaged in trench warfare with Fannie & Freddie as well as the entire private-label MBS universe over mortgage putbacks. Further, there are 8.5 million borrowers who have either been foreclosed or are currently non-performing on their loan. This is a large slice of the overall homeownership pie that has been semi-permanently eliminated from the buyer pool (7 years for most lenders to look past a mortgage default). All of this has cast a pall over banks’ willingness to underwrite new mortgages.


Many investors forget just how slippery the slope of negative home prices can be. Falling prices don’t happen in a vacuum: they have two insidious offshoots. First, they generate a tangible negative wealth effect. For reference, for all the excitement resulting from the upward move in equities recently, consider that as a rough rule of thumb, every 100 points of upside in the S&P is roughly equivalent to a 5-6% rise in home prices based on there being total direct equity wealth of $10.8 trillion and total residential housing wealth of $17.1 trillion. That said, the wealth associated with housing is much more broadly felt as 65% of American families are homeowners, a far higher proportion than those with material equity wealth. Second, negative home price trends increase pools of underwater borrowers. We have shown that there are presently 11.3 million borrowers (20% of all borrowers) who are underwater. 4.9 million of whom are underwater by more than 25%. A 20% decline in home prices from here would increase those who are underwater to 21.9 million (46% of all borrowers) and those underwater by 25% or more would rise to 9.4 million (20% of all borrowers). Laurie Goodman, a Senior Managing Director with Amherst Securities, one of the leading providers of mortgage data analytics, has shown that loans with LTVs greater than 120% are currently defaulting at an annualized rate of 19.1%, while those with LTVs between 100-120% are defaulting at an annualized rate of 11.3%. Those are scary statistics when one considers that there could be 22 million borrowers in a negative equity position with a 20% drop in home prices from here.


The real question is, what will a 20% drop in home prices feel like for the markets and for the consumer? Our guess is that it will feel a lot like getting punched in the face by Mike Tyson.


Josh Steiner

Managing Director


GETTING PUNCHED IN THE FACE - early look home price compendium

Printing Price Volatility

This note was originally published at 8am this morning, December 06, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“If the government owns all of the printing presses, it will determine what is to be printed and what is not to be printed.”

-Ludwig von Mises


On a flight to Calgary, Alberta yesterday I was reviewing “Economic Policy – Thoughts For Today and Tomorrow” by Austrian economist, historian, and philosopher Ludwig von Mises. His book, published by The Liberty Fund, compiles the following 6 lectures that von Mises gave in Argentina in 1959:

  1. “Capitalism”
  2. “Socialism”
  3. “Interventionism”
  4. “Inflation” 
  5. “Foreign Investment”
  6. “Politics and Ideas”

This book is only 75 pages long and sits amongst the classics in my library. The deep simplicity that von Mises achieves in explaining complex macro-economic issues is unrivalled. I highly recommend it to anyone looking for the opposing argument to Big Government Intervention.


In the coming weeks I’ll refer to these lectures, quoting one of the founding fathers of libertarian free-market thinking whenever the opportunity presents itself. After watching a completely politicized head of the US Federal Reserve telling stories on 60 Minutes last night, one of those opportunities is now.


Post Ben Bernanke’s interview, the #1 headline on Bloomberg this morning should shock anyone considering this country’s constitutional underpinnings: “Bernanke Says Fed May Take More Action To Curb Joblessness”… One man, one ideology, one power to print money…


Before I get into what The Ber-nank’s professional politicking for additional Quantitative Guessing (otherwise known as printing moneys) entailed, let’s take a step back and re-read what the US Federal Reserve said most recently about its go forward QG2 strategy:


“The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability."


In English, sans le Greenspan-esque obscurity, this means that the Bernanke Fed’s goals are:

  1. Fostering maximum employment
  2. Fostering price stability

Sounds nice, in theory…  but last week’s US Unemployment rate hitting a new high of 9.8% was an unmitigated train-wreck on point #1 and on point #2, never mind “price stability”… Ben Bernanke is fostering some of the highest levels of price volatility that modern markets have ever seen. How about fostering some accountability, dude.


Look at last week’s week-over-week percentage moves:

  1. SP500 = +2.9%
  2. CRB Commodities Index = +5.0%
  3. Oil = +6.5%
  4. Gold = +3.1%
  5. Copper = +6.1%
  6. VIX = -18.9%

Bernanke must be kidding himself, because he certainly isn’t kidding me. That VIX (Volatility) decline of -18.9% week-over-week came the week after the VIX rocketed +23.2% higher. At this point, he’s Printing Price Volatility in volatility itself!


Let’s go back to some of The Ber-nank’s key statements on 60 Minutes:

  1. On Growth – “we’re not very far from the level where the economy is not self sustaining…”
  2. On Employment – “it takes about 2.5% growth just to keep unemployment stable…”
  3. On Inflation – “fears of inflation are overstated…”

In response, I guess my first question is, according to who? The man’s macro-economic conclusions are littered with ideology and inaccuracy. Maybe it’s a blessing in disguise that Ben Bernanke speaks this academic dogma out loud to the world. After all, it’s better to remain a humble looking man who knows nothing about the interconnectedness of global macro markets and says nothing, than to open one’s mouth and remove all doubt.


Rather than take my word for it on this global Fiat Experiment gone bad, I can only hope at this point that the people of the world look at real-time market prices (price instability) and the outcomes of these Greenspan and Bernanke interventions on both the sustainability of growth and employment. The records speak for themselves.


As for a solution to this mess. I’ve said this before, but I’ll say it again – the first solution is to STOP – that’s it. Stop this man from doing what he is doing in perpetuating all-time highs in the price of the #1 food staple for 3 BILLION people (rice) and anything else for that matter that’s priced in the dollars that he is on a mission to debauch.


Finally, I’d like to submit a few passages from Ludwig von Mises 3rd lecture, called “Interventionism”:


“The idea of government interference as a “solution” to economic problems leads, in every country, to conditions which, at the least, are very unsatisfactory and often quite chaotic. If the government does not stop in time, it will bring on socialism.” (“Economic Policy”, page 38)


“Is there a remedy  against such happenings? I would say, yes, there is a remedy. And this remedy is the power of the citizens; they have to prevent the establishment of such an autocratic regime that arrogates to itself a higher wisdom than that of the average citizen. This is the fundamental difference between freedom and serfdom.” (“Economic Policy”, page 39)


Stop. Listen. Re-think.


My immediate term support and resistance levels for the SP500 are now 1199 and 1229, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Printing Price Volatility - Bernanke EL PNG

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