U.S. Deficit Remains Ugly

Conclusion:  The year-to-date U.S. budget deficit is -$290BN versus -$296BN in the same period last year.  Improvement, if you want to call it that.


On Friday, the U.S. government reported the federal budget deficit numbers for November of 2010.  As outlined in the chart below, the deficit for November 2010, the second month in the federal government’s fiscal year, was -$150.4BN, which is the worst November deficit on record and one of the worst monthly deficit numbers ever.  This was also the 26th straight monthly budget deficit.


In the year-to-date, which also includes October, we are actually running at a slightly better pace (in terms of a lower deficit) than last fiscal year.  Currently, the year-to-date deficit is -$290BN versus -$296BN last year.  On the positive side, the key mover has been individual income tax receipts, which are currently up $26.6BN year-over-year.  On the negative side of the ledger, total outlays, or government expenditures, are up $20.2BN year-over-year, or 3.5% growth from last year.


Income tax receipts being up on a comparative basis can be attributed to two factors according to the non-partisan Congressional Budget Office:


“CBO estimates that receipts in November 2010 totaled $148 billion, $14 billion (or 11 percent) more than receipts in November 2009. Individual income and payroll taxes combined rose by $15 billion (or 13 percent), largely because of an $11 billion (or 8 percent) rise in withheld taxes, the result of both the strengthening economy and the effects of an additional working day in November this year.”


Currently, the CBO’s deficit estimate for 2011 is $1,066BN, which is an estimated ~$228BN improvement from their actual reported deficit for 2010 of a $1,294BN. Obviously for this projected number to be met, we will need a dramatic narrowing of the deficit through the remaining 10-months of the fiscal year.


Per the CBO, the deficit actually narrowed from 2009 to 2010.  According to their view, the deficit was $1,416BN, or 10% of GDP in 2009, and $1,294, or 8.9% of GDP, in 2010.  In our analysis, which we have outlined in the table below, we actually look at spending on a normalized basis.  The primary driver of the normalized analysis is to add back TARP and payments to GSEs.  Under this scenario, the deficit actually grew 16% from 2009 to 2010.


U.S. Deficit Remains Ugly - 1


Despite seeing some marginal improvement year-to-date, the U.S. government deficit remains on an unsustainable and unprecedented path, which will eventually require dramatic policy action.  The good news, as David Einhorn aptly described earlier this year, is the deficit problem is no longer our grandchildren’s problem.  It is our problem.


Daryl G. Jones

Managing Director


U.S. Deficit Remains Ugly - US Deficit


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

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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

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