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Tales from Tunisia

“The darkest thing about Africa has been our ignorance of it.”

-George Kimble


Tunisia is the northernmost nation in Africa.  This African outpost of some 64,000 square miles and 10.3 million people is bordered by Algeria to the west, Libya to the southeast, and the Mediterranean Sea to the north and east.  While religious freedom is widely practiced in Algeria, the Tunisian Constitution declares Islam as the official state religion.


By global economic standards, Tunisia’s economy is not meaningful.  The nation’s GDP is ~$43.8BN (official exchange rate), which is about 1/8th of the market cap of Apple (currently there are no Apple stores in Tunisia).   The Tunisian labor force is split by occupation as follows: 18% agriculture, 32% industry, 50% services.  Currently that labor force is unemployed to a tune of 14%.  Coincident with this unemployment is rising inflation (CPI from 2009 to 2010 accelerated from 3.5% to 4.5%) and slowing growth (GDP from 2008 to 2010 slowed from 4.6% to 3.4%).  At Hedgeye, we call this Jobless Stagflation.


In the West, endemic Jobless Stagflation is fought by the populous at the polls, as we saw in our most recent midterms in the United States.  In nations like Tunisia, the populous often uses other methods:    most recently it was massive rioting and protests, which began on December 17th with the self-immolation of Mohammed Bouazizi (after police confiscated his unlicensed food stand) and ended on January 14th with current President Ben Ali fleeing the country for Saudi Arabia.


It seems that the people have spoken in Tunisia.  Now this could just be a Tale from Tunisia, or it could be an emerging Tail Risk from TunisiaOnly time will tell whether the so-called Jasmine Revolution becomes a key export of Tunisia, but there are many nations in the Middle East and Africa with similar characteristics - primarily Muslim, governed by a dictatorial family, slowing growth, rising inflation, high unemployment, and a young population. 


The last point on age is likely a key one.  In Tunisia, over half of the population is younger than 25 years of age.  Across the Middle East and North Africa, we see similar demographic patterns.  In demographic circles, this is called the “youth bulge”.  As healthcare broadly improved in these regions in the late 1960s, birth rates went up dramatically.  Currently, it is estimated that around 65% of the regional population is under the age of 30.  This is not a cohort that likes to be unemployed, appreciates costs of living rising exponentially, and, as evidenced by The Jasmine Revolution, is willing to stand idle while their leaders do them harm.


Ultimately, this revolution could start and end in Tunisia, and be of no greater impact, but there is certainly potential for much more, and as risk managers “the darkest” thing we could do is show “ignorance” of these facts. 


In the United States last night, we saw evidence of our most recent Democratic revolution.   In winning more than 60 seats in the recent midterms, the Republicans have certainly been acting like they have a mandate (even though we view that election as a repudiation of incumbency as much as anything).  Last night, as Keith noted in an email, “it began” with a vote on healthcare.  The House voted 245 – 189 to pass a bill to repeal President Obama’s health care plan.  Not surprisingly, the vote was unanimously supported by Republicans and the backlash from Democratic lawmakers was instant and aggressive.  The most noteworthy comment was from Representative Steve Cohen (D-Tenn), who said:


“They say it’s a government takeover of health care, a big lie just like Goebbels.”


It is likely no surprise that the US dollar is trading down on this news, with comments like Cohen’s, but also more broadly, as my colleague Tom Tobin noted this morning, “talking doesn’t get the job done.”  The new Republican majority in the House has aggressively gone after the Obama agenda, but in order for the dollar to respond favorably our elected representatives will have to do more than talk on the key economic issues facing the nation (namely the debt and deficit). 


On a more positive note, today at 1pm EST our Energy Sector Head Lou Gagliardi will be hosting a conference call on one of our most favorite long term investment regions, the Canadian Oil Sands.  His discussion is titled, “Digging Deep and Powering through the Canadian Oil Sands.”  Lou and his team have put together a 60+ page presentation that highlights the key attributes of the incredibly long term asset in Canada, with a focus on some of his best ideas in the region.  If you are looking for cheap ways to play energy and are a qualified institutional prospect, please email us at sales@hedgeye.com to join the call today.


Yours in risk management,

Daryl G. Jones


Tales from Tunisia - 3


TODAY’S S&P 500 SET-UP - January 20, 2011

Equity futures are trading just below fair value following Wednesday's retrenchment, with reaction to December quarter earnings results receiving much of the blame. Overnight, markets in Asia and Europe have continued to consolidate on the back of some strong Chinese data which raises the likelihood of further fiscal tightening by the Chinese authorities.  As we look at today’s set up for the S&P 500, the range is 32 points or -1.48% downside to 1263 and +1.02% upside to 1295.



  • 8:30 a.m.: Initial jobless claims, Jan. 15, est. 420k, prior 445k
  • 8:30 a.m.: Continuing claims, Jan 8, est. 3,985k, prior 3,879k
  • 10 a.m.: Existing home sales, Dec, est. 4.87m, prior 4.68m
  • 10 a.m.: Leading indicators, Dec, est. 0.6%, prior 1.1%
  • 10 a.m.: Philadelphia Fed, Jan, est. 20.8 prior 24.3
  • 10:30 a.m.: EIA natural gas storage change, Jan. 14, est. -228, prior -138
  • 11 a.m.: DOE inventories, Jan. 14
  • 1 p.m.: U.S. sells $13b 10-yr TIPS


  • ArQule (ARQL) is offering 7m shares in secondary offering
  • Dillards’s (DDS) says it will form a REIT unit
  • EBay (EBAY) sees 2011 adj. EPS $1.90-$1.95 vs est. $1.86
  • F5 Networks (FFIV) sees 2Q rev. $275m-$280m vs est. $281.1m
  • Kinder Morgan Energy Partners (KMP) reported 4Q adj. earnings/unit 46c vs est. 43c
  • Raymond James Financial (RJF) reported 1Q adj. EPS 65c vs est. 53c
  • SLM (SLM) reported 4Q core EPS 75c vs est. 71c
  • Xilinx (XLNX) reported 3Q adj. EPS 58c vs est. 52c
  • MannKind’s 38% drop 5 hrs before it said it didn’t get approval for Afrezza diabetes treatment may draw attention from SEC, finance professors James Angel and Tamar Frankel say
  • Emergency Medical Services has had offers from at least four PE firms as the sale process moves toward second- round bids early next month
  • Wendy’s/Arby’s plans to put Arby’s sandwich business up for sale, WSJ says
  • Life Partners is being investigated by SEC over life expectancy data, WSJ reports
  • News Corp. has told U.K. govt it may be prepared to make concession to avoid an extended review of bid to take full control of BSkyB, FT reports
  • China National Petroleum says it plans to “intensify” overseas acquisitions in next 5 yrs to meet Chinese demand
  • Chinese investment in U.S. projects and acquisitions > doubled in 2010 to ~$4.9b


  • Huntington Bancshares /OH (HBAN) 5:50 a.m., $0.08 
  • Knight Capital Group (KCG) 6 a.m., $0.20 
  • UnitedHealth Group (UNH) 6 a.m., $0.85 
  • Tyco Electronics (TEL) 6 a.m., $0.68 
  • PNC Financial Services Group (PNC) 6:30 a.m., $1.36 
  • Johnson Controls (JCI) 7 a.m., $0.54 
  • Marshall & Ilsley (MI) 7:27 a.m., $(0.24)
  • ITT Educational Services (ESI) 7:30 a.m., $3.12 
  • Morgan Stanley (MS) 7:30 a.m., $0.28 
  • Parker Hannifin (PH) 7:30 a.m., $1.29 
  • Rockwell Collins (COL) 7:30 a.m., $0.88 
  • Fairchild Semiconductor International (FCS) 7:30 a.m., $0.39
  • Southwest Airlines (LUV) 7:37 a.m., $0.15 
  • Freeport-McMoRan Copper & Gold (FCX) 8 a.m., $2.98 
  • Union Pacific (UNP) 8 a.m., $1.48 
  • PPG Industries (PPG) 8:11 a.m., $1.13 
  • Progressive (PGR) 8:15 a.m., $0.36
  • Maxim Integrated Products (MXIM) 4 p.m., $0.41 
  • Google (GOOG) 4:01 p.m., $8.08 
  • Flextronics (FLEX) 4:01 p.m., $0.24 
  • Cubist Pharmaceuticals (CBST) 4:01 p.m., $0.33 
  • Capital One Financial (COF) 4:05 p.m., $1.37 
  • Intuitive Surgical (ISRG) 4:05 p.m., $2.25 
  • Polycom (PLCM) 4:05 p.m., $0.43 
  • Tempur-Pedic International (TPX) 4:05 p.m., $0.57 
  • People’s United Financial (PBCT) 4:10 p.m., $0.09 
  • Advanced Micro Devices (AMD) 4:15 p.m., $0.11 
  • International Game Technology (IGT) 4:15 p.m., $0.20 
  • Skyworks Solutions (SWKS) 4:30 p.m., $0.44$0.71


Yesterday, the XLB broke the HEDGEYE TRADE duration - 8 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow (0.11%), S&P (1.01%), Nasdaq (1.46%), Russell 2000 (2.56%)
  • Last Week: Dow +0.96%, S&P +1.71%, Nasdaq 1.93%, Russell +2.51%
  • Year-to-date: Dow +2.14%, S&P +1.93%, Nasdaq +2.73%, Russell +0.41%
  • Sector Performance - (All 9 sectors declined): - Materials (2.31%), Financials (2.23%), Energy (1.21%), Industrials (1.05%), Consumer Disc (1.00%), Tech (0.72%), Healthcare (0.68%), Consumer Spls (0.20%), Utilities (0.24%).


  • ADVANCE/DECLINE LINE: -1667 (-1917)  
  • VOLUME: NYSE 1088.87 (-11.31%)
  • VIX:  17.31 +9.07% YTD PERFORMANCE: -2.48%
  • SPX PUT/CALL RATIO: 2.28 from 1.48 (+53.93%)


Treasuries were stronger today with the weakness in stocks and disappointing housing data. Fed buying was highlighted as another tailwind.

  • TED SPREAD: 14.79 -0.507 (-3.315%)
  • 3-MONTH T-BILL YIELD: 0.16%      
  • YIELD CURVE: 2.76 from 2.79


  • CRB: 333.43 -0.10%  
  • Oil: 91.38 -0.17% - trading +0.58% in the AM
  • Oil Rally Sends Sweet Price to $100 for First Time Since '08
  • COPPER: 442.80 +0.36% - trading +0.24% in the AM
  • Copper Falls for Second Day on Concern China May Move Again to Curb Growth
  • GOLD: 1,372.68 +0.49% - trading +0.36% in the AM


  • Chalco Jumps Most in 4 Months on Report Parent Plans Rare Earth Expansion
  • Silver May Decline 20% as Coin Sales Signal `Crowd'
  • Corn, Soybeans Advance as Argentine Farmers Withhold Shipments on Taxes
  • Sugar Climbs in London After Report Russia May Import Earlier; Cocoa Rises
  • German $96 Billion Asia Trade Jeopardized by Shallow Elbe
  • ANZ Raises Base Metals Forecasts Through 2013 on `Upbeat' Demand Outlook
  • BHP Second-Quarter Iron Ore Gains to Record; Queensland Coal Hit By Floods
  • Korean Meat Imports to Gain on Foot-and-Mouth Cull, Helping U.S. Exporters
  • China Probe on U.S. Dried Distillers Grains to Boost Corn Imports
  • Rubber Advances to Record on Accelerating China Growth, Tightening Supply
  • Copper Shortage to Be Worst Since 2004 Amid Economic Recovery
  • Flooding in Australia May Propel Wheat Crop to Record


  • EURO: 1.3480 +0.90% - trading +0.05% in the AM
  • DOLLAR: 78.640 -0.41% - trading -0.08% in the AM


  • FTSE 100: (1.54%); DAX: (0.96%); CAC 40: (0.62%) (as of 6:30 ET)
  • European markets trade mixed but peripheral markets trading better Spain up +0.7% on rumors the country plans to ratchet up aid to cajas in bid to stave off international bailout.
  • Sentiment was influenced by disappointing earnings, while strong economic data from China increased the likelihood of Chinese fiscal tightening.
  • Bond yields were pressured by supply from France which is due to issue €12B of bonds later today and peripheral yield spreads are little changed.
  • Spanish bonds rise; Portuguese bonds fall
  • Declining sectors lead advancers 11-7 with autos (3.1%) and travel (2.7%) leading fallers, with banks and insurers leading gainers up +1.4%.
  • Ahold reports Q4 Group net sales €6.98B vs Rtrs €6.90B, says the environment remained challenging
  • Remy Cointreau reports Q3 revenues €266.7M vs Rtrs €261.5M, cautious on Q4 vs tough comps, forecasts good growth in turnover and financial results for FY11
  • Germany Dec PPI +5.3% y/y vs consensus 5.0%


  • Nikkei (1.13%); Hang Seng (1.70%); Shanghai Composite (2.92%)
  • Asian markets followed Wall Street down today, as strong growth in China rekindled fears that more tightening measures are coming.
  • Weakness in bank and tech stocks brought South Korea down 0.43%.
  • Miners led Australia down 1.05%. Virgin Blue soared 10% when Air New Zealand bought a substantial stake.
  • Banks led Japan down after disappointing earnings from US peers.
  • Hong Kong followed China down. Li & Fung managed a 1% gain on a block trade.
  • In China, banks fell on news that they extended more than CNY1T in new loans by yesterday, and China Development Bank Corp ordered its branches to stop lending for the rest of the month.
  • China 2010 GDP +10.3% vs consensus +10.1%. Q4 GDP +9.8% y/y vs +9.2% consensus. 2010 CPI +3.3% vs government target of +3.0%. December CPI +4.6% y/y vs +4.7% consensus. December PPI +5.9% vs +5.5% consensus. December convenience-store comps +3.3%.


FL: Sales Uptick Observed

With two weeks left in Foot Locker’s fiscal fourth quarter, we present an update of our proprietary index of weekly athletic footwear and apparel data.  And, we like what we’re seeing.  With two weeks to go, quarter-to-date trends accelerated over the past two weeks suggesting that same store sales are tracking up at least 5.4%. This marks an acceleration of about 50 bps from our last update on 1/6.  We also note that comparisons over the next few weeks should ease, given extremely weak industry trends observed at this time last year. 


  •  Street looking for 5.5% comps, we’re modeled at 6%.  However, we note that last quarter’s predicted comps came in light by about 200 bps.  We believe the index is still understating the company’s top line through 4Q as well.
  •  Categories that actually matter most to FL are accelerating, i.e. Basketball and Apparel.   Apparel, while still a small part of the FL story, is becoming a key source of upside and will continue to be an incremental driver throughout 2011.
  •  Reminder on reporting dates/catalysts.  FL won’t report until 1st week of March.  They have no history of pre-announcing positively (or at all!) under the new management team.   Therefore there may be increased speculation/volatility in the near-term as the name trades with the rest of retail in the absence of reported data.
  •  The overall industry bifurcation between performance and non-performance footwear trends remains at its widest spread in over 2 years.  We believe the running and basketball acceleration coupled with a lower than avg. reliance on toning are key to FL’s solid top line results. (see chart below)

FL:  Sales Uptick Observed - FL CompTrack 1 19 11


FL:  Sales Uptick Observed - FW Perf v NonP 1 19 11


Eric Levine



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Valued Client,


Each quarter, the Hedgeye Macro Team hosts a presentation and call for valued MACRO clients and a limited number of qualified prospective clients, outlining our 3 key Macro themes.


2010 was an exciting year for us, and our Macro clients have stayed ahead of some major key Macro market moves we flagged early: 

  • Chinese Ox in a Box (1Q)
  • Buck Break Out (1Q)
  • Sovereign Debt Dichotomy (2Q)
  • April Flowers/May Showers (S&P Short) (2Q)
  • Housing Headwinds (3Q)
  • Bear Market Macro (3Q) 
  • Consumption Cannonball (4Q)

What are we saying this year?


Today, Wednesday, January 19th, our MACRO team hosted our Q1 Key Macro Themes call to help our MACRO clients prepare for what's in store over the intermediate-term TREND. The call was hosted by our CEO, Keith McCullough, and Managing Directors Daryl Jones (Macro), Howard Penney (US Strategy; Restaurants) and Josh Steiner (Financials; Housing). The themes for 1Q11 are:


American Sacrifice (Bullish on USD)

  • Ron Paul auditing Bernanke
  • Midterm election spending cut promises
  • Debt ceiling debate + debt/deficit commission decisions 

Trashing Treasuries (Bearish on UST)

  • Breakout in global inflation
  • Sovereign, state, and muni risk premiums mount
  • Across the curve breakouts in yields 

Housing Headwinds Phase II (Bearish on US Housing Prices and Consumption) 

  • Updated Price declines since we made call for Phase I
  • Updated supply and demand
  • Updated housing price projections  

To access the podcast copy/paste the following link into the URL of your web browser: https://www.hedgeye.com/feed_items/11301.


To access the slide deck please click here. Copy/paste the following link into the URL of your browser if you are having trouble opening the hyperlink: http://docs.hedgeye.com/Q1%20Macro.pdf.


As always, if there are any questions, please email and we'll be sure to get back to you with an answer ASAP.


Best regards,


The Hedgeye Macro Team


This week we are rolling out our weekly commodity monitor.


Commodity costs, and how companies manage them, are going to play a large role in deciding the winners and losers in the restaurant space in 2011.  This product is going to be developed further over the coming weeks and makes up an important part of our daily process.


WEEKLY COMMODITY MONITOR - commodity monitor Jan 19 2011



1.  The sharp increase in dairy costs, especially cheese, is notable for many companies within the restaurant space. 

  • CAKE’s COGS increased by 50 basis points last quarter largely due to pressure from dairy and cheese costs.  The company’s commodity basket remains exposed to dairy.
  • DPZ saw margins impacted adversely by rising cheese prices in 3Q10.  Cheese prices in that quarter rose 28.6% versus the prior year, according to management commentary on the earnings call.
  • CMG recently moved from contract to spot prices for sour cream in order to source from local and organic sources.  The company is exposed to the possibility of further gains in food stuffs prices given their sourcing of ingredients from spot markets.


2.  Coffee prices came down week-over-week.  The absolute level remains high, however, and the year-over-year column tells the more pertinent story for coffee vendors.

  • SBUX have raised coffee prices along with many others in the space due to the upsurge in coffee prices over the past year. 
  • The recent abatement will provide some relief for SBUX, GMCR, and PEET.


3.  Beef costs slowed down week-over-week.  Year-over-year, prices are still at high levels and will impact the bottom line of many restaurant stocks as we move through 2011.

  • SONC is only locked in on beef costs through the end of January 2011, according to their most recent earnings transcript. 
  • MCD guidance is for approximately 1-2% of blended food basket inflation in 2011.  I expect high year-over-year margins to hamper MCD’s efforts to maintain the lofty margins achieved in recent quarters, helped greatly by beverage sales.  See my latest MCD Black Book for details.
  • PFCB is locked in for beef for 2011.
  • TXRH has 80% of protein needs contracted for 2011.
  • MRT disclosed that it is not contracted on any beef purchases past 2010 and expressed a willingness to pursue several strategies, including taking price, if appropriate. 

Howard Penney

Managing Director


The gambling bill could be yet another new market for slot suppliers



According to various news agencies, the Greek government has finalized plans for its gambling bill.  It will include a tender for 4 to 10, 10-year VLT licenses - permitting 30,000 VLTs.  This is a significantly larger proposal than the 50,000 total VLTs that was previously reported in the media.  Furthermore, the Greek government could tender additional smaller scale licenses for another 5k VLTs in total. The bill also includes 15-50 internet betting licenses, which will be allocated through an international tender.  Consistent with the thesis as outlined in our recent note "TIS THE SEASON", this was another favorable headline for slots.


Additional details:

  1. Qualifying bidders (OPAP is a leading candidate) must operate a company based in Greece or the EU with permanent presence in Greece and capital that exceeds €200k
  2. The minimum drop will be €0.10 and up to €5
  3. The payout for these games will be set at 80%
  4. The tax rate will be 6% of revenues


Here is a timeline of the gambling bill:


What has happened so far:

  • February 2010: To avoid EU fines, Finance Minister George Papaconstantinou said he will unveil a draft bill to deregulate slot machines, which can currently only be used in casinos.
  • June 2010: Greece finance ministry said in an email that it will soon release a draft law on electronic gaming and Internet betting and that it will be presented for public consultation.
  • July 2010: Skeleton draft detailing tender process was prepared.
  • August 2010: Start of public consultations on regulating gambling
  • Sept 2010: Dialogue on the gaming draft law
  • Jan 2011: Finalization of bill framework

What are the next steps (with tentative dates):

  1. Submission of bill to Parliament (Spring/Summer 2011)
  2. Passage of bill in Parliament (Late 2011)
  3. Bill sent to President Papoulias for promulgation and publication in the Government Gazette (2012)
  4. Setup of new gaming supervising committee (mid-2012)
  5. Tender process (2013)

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