Overall, low volume trading continues in the restaurant space with some exceptions including notable casual dining names trading down on high volume.


Coffee house concepts such as Starbucks, Green Mountain, and Peet’s declined yesterday as coffee continues along a parabolic path to the upside.  GMCR, saw no bounce after the sharp downward move on Friday due to disappointing guidance embedded in their earnings release on Thursday.  In fact, they underperformed all QSR peers on high volume, declining 5.5%.


Chipotle also declined 5.1% yesterday which was interesting.  I am hesitant to call capitulation here, given how strong this stock has been, but the valuation is certainly egregious and my view on their commodity exposure remains the same.  That is, they are largely un-contracted and food inflation is going to meaningfully impact restaurant stocks over the next few quarters.  Their operating margin performance has been terrific but the task of maintaining that level, with commodity costs rising so sharply, is an onerous one. 


Other notable moves yesterday:

  • RRGB: Activist shareholder, Oak Tree Capital Management, filed a 13-D on Friday
  • CHUX: Closing stores.  Right-sizing a business is a good sign for the long term prospects of a restaurant company and also reflects favorably on the sobriety of the management team
  • CAKE, PFCB, DIN, EAT:  All declined on strong volume.


In terms of commodities, here is a list of headlines to be aware of this morning:

  • Florida Orange Crop to Avoid “Killer” Overnight Freeze
  • Copper Climbs to Record in London on Speculation Demand to Exceed Supply
  • Cotton Advances by Limit as USDA Predicts Inventory Decline to 14-Year Low
  • Australia Reduces Commodity Export Sales Outlook on Weather
  • Oil to Exceed $100 in 2011 as OPEC’s Spare Capacity Shrinks
  • Corn May Extend Rally 5% to End Year on `Strong Note'
  • Gold Demand, Mini-Contract Trade in Korea to Climb, Exchange Operator Says
  • Sugar Production in Australia May Plunge to 19-Year Low, Forecaster Says
  • Corn Futures Decline as Gain to One-Month High Prompts Sales; Wheat Drops
  • Coal Imports May Rise 78% to China, India, Drive Up Prices: Energy Markets
  • Eveready Raises Prices of Some Batteries as Zinc Costs Rise; Shares Jump
  • Marubeni to Spend $297 Million to Double Global Water Assets by March 2013


TALES OF THE TAPE - qsr 1214



Howard Penney

Managing Director


The Macau Metro Monitor, December 14th, 2010



Galaxy said it has not hired anyone from Vietnam to date for its Cotai resort, denying accusations of illegal recruitment abroad. Over 500 people “have already begun work at Galaxy Macau” and the 2,700 MSAR residents already hired will also start work “over the next two months,” Galaxy added.

Fed Fighting

“Pick a fight.”

-Jason Fried & David Heinemeier Hansson


Seth Godin said “ignore this book at your own peril.” Tom Peters said “the clarity, even genius, of this book actually brought me to near tears on several occasions. Just bloody brilliant, that’s what.”


I gave this book to everyone on our team for a recent strategy session. It’s called “REWORK” and I think you can not only apply it to how you think about your company and portfolios, but how you think about your life. Learn, Unlearn, and Rework. It’s healthy.


Some people don’t like to fight. I do. Especially when I find someone on the other side of something that I am passionate about. If you’re going to pick a fight though, and take this from a 5 foot 9 inch hockey player, you better pick the ones you can win.


Conventional wisdom says don’t “fight the Fed.”


We live in unconventional times.


Not only do I think it’s a great time to pick a fight with the Chairman of the Federal Reserve, I think we can win.


“We” isn’t a group of passionate people in New Haven, Connecticut. “We” isn’t all of the Americans who are, pardon the pun, fed up with Big Government Intervention in our markets. “We” are the world’s risk managers.


The Chinese are fighting the Fed. So are the Australians, Brazilians, and Germans.  So let’s line up what’s in our corner this morning and go through who and/or what can help us engage in Fed Fighting:

  1. Global Inflation
  2. Global Bond Yields
  3. The US Dollar

Let’s go in reverse order and start with the US Dollar first. Last week the US Dollar was up another +0.86% for the week.  It closed higher for the 5th week out of the last 6 and +5.3% higher than its YTD low established on November the 4th (post QG2 and the midterm elections).


We’ve been long the US Dollar (UUP) since November the 4th in anticipation of both global inflation accelerating and globally interconnected risk compounding. We’ve also had a keen eye on the macro calendar catalyst pending in the new year of both Ron Paul being able to subpoena the Fed and Republicans having a mandate for American Austerity measures.


Global bond yields are chasing higher and breaking out on both our TRADE and TREND durations. Despite US Treasury yields selling off in the last 24 hours ahead of The Ber-nank’s FOMC decision today, they remain in a very bullish pattern – and, as a result, the entire bond market is in a very bearish immediate-term position.


The TRADE and TREND lines for 2s, 10s, and 30s across the US Treasury Yields curve are as follows:

  1. 2-year yields have TRADE and TREND lines of support of 0.49% and 0.46%, respectively.
  2. 10-year yields have TRADE and TREND lines of support of 2.87% and 2.68%, respectively.
  3. 30-year yields have TRADE and TREND lines of support of 4.26% and 3.94%, respectively.

All of these moves in US yields are being perpetuated by:


A) Asian yields rising on government interest rate hikes, and

B) European yields rising on both inflation and sovereign debt risk.


This morning’s Spanish 12-month bond auction yielded 3.44% versus 2.36% in the prior auction and inflation in the UK remained above the Bank of England’s token target, pushing to +3.3% in November versus +3.2% in October.


Global inflation has been driving bonds lower for the last 6 weeks. No matter what Ben Bernanke says about inflation in his statement today, the market is already running way ahead of him on this. Remember, markets don’t lie; politicians do.


Sure, you can make a case that in the face of tax cut extensions US growth expectations are rising as well. But don’t mistake short-term levered-growth (cutting taxes and ramping the deficit/GDP ratio) for sustainable organic GDP growth.


Whether it’s the price of the CRB Commodities Index (up +20.5% since the day in August that The Ber-nank decided to inflate), or the price of copper hitting an all-time-high of $4.22/lb this morning (+31% since August), I don’t think I’m alone in picking a fight with the Fed on this fine December day of 2010.


Global markets have my back. If you are politicking to debauch the dollar again today Mr. Bernanke, keep your head up.


My immediate term TRADE support and resistance lines for the SP500 are now 1226 and 1246, respectively. We remain short both the SP500 (SPY) and the short end of the US Treasury markets (SHY) in the Hedgeye Portfolio.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fed Fighting - 1


TODAY’S S&P 500 SET-UP - December 14, 2010

As we look at today’s set up for the S&P 500, the range is 20 points or -1.17% downside to 1226 and 0.45% upside to 1246.  Equity futures are trading modestly above fair value in the wake of Monday's late session retreat which left the S&P flat on the day. Today's FOMC meeting is unlikely to provide any fireworks, but Fed Chairman Bernanke's comments will as ever, be monitored for any changes in policy tone.   Before the open PPI and Retail Sales for Nov will be the main focus.

  • Advent Software (ADVS) approved 2-for-1 stock split
  • Amgen (AMGN) said top-line results from Xgeva trial showed significantly improved survival in some prostate-cancer patients
  • Baxter International (BAX) approved $2.5b share-repurchase plan
  • Genoptix (GXDX) has put itself up for sale and hired Barclays to run an auction, people with knowledge of matter say
  • Genzyme (GENZ) said it will hold an investor event to discuss the commercial potential of Alemtuzumab on Dec. 20
  • Hexcel (HXL) sees 2011 adj. EPS 90c-98c vs est. 98c
  • InterDigital (IDCC) approved 10-c quarterly dividend
  • Pfizer (PFE) boosted Q dividend to 20c-shr, vs BDVD est. 21c-shr; also elected George Lorch as a non-executive chairman
  • Williams Partners (WPZ) announced plan for 7.5m unit secondary offering


  • One day: Dow +0.16%, S&P +0.00%, Nasdaq (0.48%), Russell (0.61%)
  • Last Week:  Dow +0.25%, S&P +01.28%, Nasdaq +1.78%, Russell +2.70%
  • Month-to-date: Dow +3.84%, S&P +5.07%, Nasdaq +5.07%, Russell +6.2%
  • Quarter-to-date: Dow +5.94%, S&P +8.7%, Nasdaq +10.82%, Russell +14.19%
  • Year-to-date: Dow +9.59%, S&P +11.24%, Nasdaq +15.68%, Russell +23.46%
  • Sector Performance: Energy +0.79%, Materials +0.52%, Utilities +0.46%, Healthcare +0.07%, Telecom +0.07%, Consumer Staples +0.05%, Industrials +0.01%, Financials (0.12%), Tech (0.32%), and Consumer Discretionary (0.54%)


  • ADVANCE/DECLINE LINE: -237 (-1064)  
  • VOLUME: NYSE 963.12 (-1.17%)
  • VIX:  17.55 -0.34% YTD PERFORMANCE: -19.05%
  • SPX PUT/CALL RATIO: 1.26 from 1.48 -15.04%  


  • TED SPREAD: 17.07 -1.116 (-6.137%)
  • 3-MONTH T-BILL YIELD: 0.15% +0.02%  
  • YIELD CURVE: 2.68 from 2.68


  • CRB: 319.87 +1.58%
  • Oil: 88.61 +0.93%
  • COPPER: 420.70 +2.31%
  • GOLD: 1,405.88 +0.69%


  • EURO: 1.3382 +1.18%
  • DOLLAR: 79.284 -0.98%




  • European markets trade mixed to lower as market participants await the latest data points to gauge the economic outlook and ahead of the FOMC meeting later today. Major indices initially fluctuated either side of unchanged
  • Disappointing UK inflation report and significantly higher yields on the Spanish debt auction saw indices drift towards session lows.
  • Declining sectors lead advancers 10-8, with banks leading fallers (1.2%), while healthcare led gainers +0.6%.
  • France Nov EU Harmonised CPI +1.8% y/y vs con +1.8%
  • UK Nov CPI +3.3% y/y vs con +3.2%
  • UK Nov RPI +4.7% y/y vs con +4.4%
  • Eurozone Oct Industrial Production +6.9% y/y vs consensus +7.6% and prior revised +5.4% from +5.2%.  Eurozone Oct Industrial Production +0.7% m/m vs consensus +1.3% and prior revised (0.7%) from (0.9%) 
  • IFO raises German 2011 growth forecast to +2.4% from +1.5%
  • Swiss government raises 2011 GDP forecast to +1.5% vs prior +1.2%, 2010 est GDP +2.7%, guides 2012 GDP +1.9%


  • Most Asian markets went up this morning, though they traded in a tight range.
  • On hopes for higher demand in the holiday season, high tech stocks drove South Korea to close above 2000 for the first time in three years.
  • Mild profit-taking held Japan to a very slight gain, though breadth was strongly positive. The market got a boost when Prime Minister Naoto Kan told ministers to cut the country’s corporate tax rate by 5 percentage points starting next FY, though passage of the bill is not guaranteed.
  • On higher commodity prices, energy shares rose in very light trading in Hong Kong.
  • Australia edged up, though banks fell 1% on profit-taking.  AGL Energy lost 5% after announcing it did not acquire any electricity assets that New South Wales is privatizing.
  • Profit-taking in energy companies kept China flat. Computer software providers gained on government support for the industry. Banks fell on reports that the central bank has extended a temporary 50-bp increase in the reserve-requirement by three months for some banks.
  • Japan October industrial output revised to (2.0%) m/m vs preliminary (1.8%).

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends














This note was originally published at 8am this morning, December 13, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Knowing others is intelligence, knowing yourself is true wisdom.”

-Lao Tse


The closing of the year elicits contemplation and self-reflection. No, I’m not going to head down the road of providing a list of 10 surprises.  These lists are generally interesting to read, but – ironically – many of the forecasted “surprises” become consensus and are not particularly useful from an investment idea perspective. 


At Hedgeye, we like to think about what is going to happen in the next three month as opposed to where we are going to be 12 month from now.  As we like to say, “You’ve got to play the game that is in front of you.” Playing the game requires discipline and some self reflection to stay grounded.


Of course, as with anything, it is easiest if you have a process or methodology.  On a personal level, yoga is one thing that helps me to enjoy introspection.  In India, the method of self-reflection is called svadhyaya: Sva means “self” and adhyaya means “investigation, inquiry, or education”.  If you practice, svadhyaya it helps you observe moment-to-moment changes in your mind and pose important introspective questions. How are you feeling in your body? Is your mind present? What subject matter draws your mind away? 


When it comes to Hedgeye, we try to have a method for observing moment-to-moment changes in the market and also in our current stances on different themes and investment ideas we generate for our clients.  As we’ve said time and again, clients are a key part of this process and their feedback aids us immeasurably in our efforts to better serve them.


Heading into the New Year, it’s an appropriate time to reflect upon (1) What has transpired? (2) Where are we headed? and (3) What is left undone?   Svadhyaya is what we aspire to at Hedgeye; the ability to investigate, inquire, and educate ourselves and our processes.  Knowing oneself and obtaining true wisdom is likely a goal to be chased but never quite achieved.  If the pursuit of this goal enriches our perspective on markets and processes then that, in and of itself, makes us better on the margin.  And, as we always say, what matters happens on the margin.


Hedgeye’s take on the intermediate-term global macro outlook is three-pronged:

  1. Growth is slowing
  2. Inflation is accelerating
  3. Interconnected risk is compounding

It has been our view for some time that interest rates are going higher.  In terms of timing this call, it is extremely difficult given the scale of government interference in capital markets in recent times.  This call is, quite simply, anchored on our view that global risk is compounding.  Last week the US 10-year Treasury yield reached 3.33%, 28% higher than a month ago, compared with Germany’s borrowing costs rising +27% to 3.03%.  The trend continues today with the US Treasuries getting smoked again this morning as the world continues to see the inflation that Ben Bernanke is not allowed to see.


Yes, inflation is accelerating globally.  People are paying higher prices for what they use to feed themselves, clothe their children, and drive their cars than one year ago.  CPI in China accelerated to a 28-week high of 5.1% year-over-year in November.  Food inflation accelerated to 11.7% year-over-year.


The price of oil recently hit $90 for the first time in two years, gas prices at the pump are at $3.00 and according to Bloomberg, consumers of food made from wheat and corn should brace for higher prices, if history is any guide, after bad weather and a shortage of farmland threaten to create supply “shock waves”.


In keeping with the idea that we must play the game that is in front of us, the “growth is slowing” theme is being challenged by the “fiscal lunacy” of the politicians in Washington who will be adding another $900 billion to the deficit over the next five years.  Now the latest projections are that the USA 2011 budget deficit will hit $1.5 trillion after it was just $1.1 trillion a few months back. 


On the heels of the tax plan, consensus expects that the tax reductions will add 1% to GDP growth in 2011 (one time boost).  Side-effects of Bernanke’s monetary policy will, in my view, go some way towards offsetting this boost.  As the Federal Reserve stokes inflation through Quantitative Guessing, a run up in rates, coupled with a 15-20% decline in home prices in 2011, will mitigate the benefit of lower taxes.


The combination of inflation and ever-increasing debt levels does not encourage growth, it inhibits it!  Jobless Stagflation is a theme we’ve been highlighting for months and it will become clearer to many as 2011 proceeds.


I believe it would be beneficial for the administration to consider svadhyaya as a New Year Resolution.  The government today is an active participant in the markets.  To what end this participation?  Is there an end to this participation?  If government’s role is to protect employment levels and maintain price stability, I think the scoreboard speaks for itself on both counts. 


Projections offered by the administration in 2009 as to where unemployment would peak during this crisis have been far surpassed.  If government’s role is to somehow protect and enhance the life that its citizens lead, the almost 43 million people surviving on food stamps may have something to say about the administration’s success on that score.  It’s not that the administration it not trying; it is relentless in its pursuit of what it thinks is needed to bolster the obviously fragile economy. 


I do not believe it would take an otherworldly bout of introspection for the administration to realize that these efforts are not working and, more pointedly, they are expensive.  The public sector furor defined by massive government balance sheets has taken hold in Europe and you can bank on it coming into the fold in the U.S. in the not-too-distant future. 


David Einhorn of Greenlight Capital was interviewed by Charlie Rose on December 6th and highlighted some “unfinished business” that was left unresolved from the last crisis.  Einhorn is a thoughtful person and offered a metaphor for the economy at present of being “between two storms”.  The private sector storm was first but the public sector crisis is coming.  I don’t know David Einhorn and he may not be a yoga aficionado, but I would hazard a guess that svadhyaya would not be a completely foreign concept to him. 


Function is disaster; finish in style


Howard Penney



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