Notable news items and price action over the past 24 hours:

  • WEN shares surged on emerging news of Wendy’s/Arby’s planning to sell Arby’s.  I have been in favor of this divestiture for some time and wrote about this yesterday.  I think the stock is worth close to $7.
  • MCD was the subject of yet another positive report, this time from Janney.  There were some interesting points in the report, including; “For this go-round of the survey, we asked our participants the following two questions: ‘The Wall Street Journal recently reported that, at present, McDonald’s offers over 100 menu items. Do you feel menu complexity is a problem in your operations?’ and ‘What items (if any) would you remove from the McDonald's menu, and why?’  The majority of responses indicated that in fact franchisees believe that the menu is getting to be too complex.  Some respondents to the survey stated that the menu contained “too many slow moving products such as salads, McCafe” and that “Even our customers know it and complain they can’t read the menu boards.”  Thank you to Janney for confirming what we already knew.  Franchisees want McCafe to go because it is not working.  As I said last week on an conference call with clients, Starbucks can’t sell food and McDonald’s can’t sell espresso because these products are not part of their core business.
  • MCD - In maple country of Vermont, consumers know the real thing. So starting Feb. 1, customers at Vermont McDonald's stores can request 100 percent maple syrup or sugar to be added to the restaurant chain's new Fruit and Maple Oatmeal to settle complaints that the company improperly labeled the product as maple flavored in the state.
  • YUM  - down on accelerating volume.  The company has the street focused on Emerging markets as the next avenue of growth for the company.  The current problem with that  is slowing growth in the Emerging markets in 2011.  As Keith McCullough noted today Asia was a mess again overnight; China bounces to another lower-high (to down -3.3% YTD), but Indonesia, which has been getting powdered YTD lost another -2.2%, Korea had its worst day in 3 months -1.7% and Japan wasn’t much better at -1.6%. Thailand, which internally cut their GDP growth forecast this week almost in half vs. LY +8% GDP down another -1.5%.  Global Inflation matters when it ramps sequentially like this. It always has – and a 42% owner’s equivalent rent weighting on US CPI will not change that.  MCD will be impacted too.
  • EAT, PFCB, CAKE, and  CBRL gained on accelerating volume.  Brinker continues to perform well and, the intra-quarter slowdown in Knapp Track trends notwithstanding, I maintain a positive view on this stock for 2011. 
  • The Orlando Sentinel published a story titled, “Rising food prices hit Central Florida shoppers” which details the impact of rising prices on food consumption patterns, particularly those of older generations living on fixed incomes.



Howard Penney

Managing Director


The Macau Metro Monitor, January 21, 2011

WYNN LEADS FROM THE TOP Intelligence Macau,

Steve Wynn announced a 6% salary increase yesterday for all the company’s non-management employees, effective February 1, 2011.  He said, “This is our grateful response to the leadership provided by Chief Executive Fernando Chui Sai On and Secretary Francis Tam concerning the rise in the cost-of-living for Macau residents.” 


IM praised Wynn's decision, citing its leadership in dealing with the inflation issue and a reminder on why Wynn Macau deserves a valuation premium.  Also,  IM says the timing of the announcement is interesting given that there have been rumors of poor credit decision-making by inexperienced staff at some of the other casinos.




Dec CPI rose 0.59% MoM and 3.92% YoY.  Inflation rate for 2010 stood at 2.81%.

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The Ber-nank's Housewives

“By and large, mothers and housewives are the only workers who do not have regular time off. They are the great vacationless class.”

-Anne Morrow Lindbergh


Japanese Equities closed down -1.6% overnight and have been making a series of lower-highs from their leverage-cycle peak for more than 2 decades. Japanese housewives are not happy.


In an especially interesting survey from the Sompo Japan Life Insurance Company this week, it appears that Japanese housewives are getting plugged by global inflation. Their secret savings (or what the Japanese called hesokuri) fell -18% in 2010 to their lowest levels since late 2007. Not ironically, that’s also when US Consumption rolled into the red for the 1st time after 64 consecutive quarters (or 13 years) of being positive.


As Ludwig von Mises said, inflation is a deliberate policy that government people choose without openly stating it to the public. Whether or not a humble looking man with a beard calls it that or not from his perch upon-high at the US Federal Reserve is of no concern to the rest of the world. Unfortunately, the large majority of the world’s population doesn’t consider US owner’s equivalent rent (42% of US CPI) inflation.


Whether they be Japanese housewives or folks in India and Indonesia (the 2nd and 4th largest country populations in the world, respectively), energy and food prices matter – big time.


In the Japanese survey, vegetable prices, energy bills, and higher tobacco taxes ranked #1, #2, and #3 as top concerns. In Japan, don’t forget that it’s the women who make most of the budgeting decisions in Japanese households (Darius Dale and I scoured the survey looking for all of the offsetting goodies Japanese women found associated with Japanese style Quantitative Guessing (QG), but couldn’t find any).


Quantitative Guessing (QG) in Japan has obviously failed. That should be no surprise however as it’s been empirically proven at this point (Reinhart & Rogoff) that when a country crosses the proverbial Rubicon of debt/GDP thresholds (over 90% debt/GDP), long-term economic growth is structurally impaired.


The Keynesian/Princeton-connection of Paul Krugman (who told the Japanese to “PRINT LOTS OF MONEY” in 1997) and Ben Bernanke really don’t like it when Global Macro Risk Managers call out these simple concepts like real-world inflation and structurally impaired growth. That’s because their charlatan storytelling is largely focused on fear-mongering about depressions and deflation.


Whether you want to do your own channel checking on this and call the 57,000 Japanese housewives in the survey or the 44 MILLION Americans that are currently on food stamps (all-time high; nice job Ben), I think that calling anyone who lives on a budget will render the same answer.


If you’ve been positioned long-dong silver anything Emerging Markets in the last 3 months (stocks or bonds), you see the same inflation readings that housewives and I are talking about. It’s on your screen.


There’s really 1 thing that can crush both Bond and Emerging Market investors alike – inflation. When the “reflation” trade becomes the inflation, it can start to hurt equity market returns too.

For the YTD, here’s what’s going on in Global Equities outside of where Apple is trading:

  1. Indonesia = down -8.7%
  2. India = down -7.3%
  3. Peru = down -7.1%
  4. Egypt = down -6.2%
  5. Philippines = down -6.0%
  6. China = down -3.3%

Chinese growth slowing is perpetuated by inflation accelerating. When the Government of Thailand cut its GDP forecast in HALF this week (versus 2010’s +8% growth) to 4-5% for 2011 they weren’t thinking about how many cashmere sweater-sets Macy’s is selling on snow days. They pointed to one issue  - Chinese growth slowing.


Yes, at a point, Chinese demand slowing should take the edge off The Ber-nank’s inflation trades. The inflation is sticky, but it can come off its highs. In fact, in the last 24 hours, we’ve seen the following 3 immediate-term TRADE lines break in our Global Macro risk management model:

  1. Brazil’s Bovespa Index immediate term TRADE line support = 70,554, broken
  2. Copper immediate-term TRADE line support = $4.31/lb, broken
  3. Basic Materials Sector ETF (XLB) immediate-term TRADE line support = $38.51, broken

And yes, part of these rollovers in inflation readings have to do with sober governments in Emerging Markets either raising interest rates or signaling that they will (Brazil raised +50bps yesterday and the Chinese signaled).


But the best way to fight Global Inflation Accelerating, is for the world to see a sustainably strong US Dollar. That’s where the real popular political juice is. That’s where American credibility in the global financial community can find her footing again. That’s what I and the hardest working global class we have, housewives, want to see.


My immediate term support and resistance levels for the SP500 are now 1264 and 1295, respectively.


Best of luck out there today,



Keith R. McCullough

Chief Executive Officer


The Ber-nank's Housewives - housewives

Complex Simplicities

This note was originally published at 8am on January 18, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I must forever make the complex the simple.”

-Martin Luther King, Jr.


Ironically enough, one of my best friends gave me “The Autobiography of Martin Luther King, Jr.” for my birthday a few weeks back. Notwithstanding that he didn’t know I’d be on my back reading for the last week, the timing of this gift was impeccable. Dr. King’s passion has forever made the complex the simple.


Complex Simplicities are what we chaos theorists wake up looking for each Global Macro market morning. One of my favorite risk management books of all time (“Deep Simplicity”, by John Gribbin) got me hooked on the basic principles of chaos and complexity theory back in 2006. Thank God for those teachings. They saved our clients and our firm a lot of money in 2008.


Investment opportunities in a globally interconnected ecosystem are omnipresent. While there may be Apple days in California and snow days in Connecticut, there is no such thing as “risk on” and “risk off” days in Global Macro markets. In fact, when I hear people say that, all I can do is smile. Accepting chaos theory in risk management means accepting uncertainty, every day.


Over the intermediate-term TREND, there is no such thing as market certainty. The only thing you can be certain of, after a +91.3% melt-up in US stocks since March of 2009, is that for the immediate-term groupthink session everyone on the Barron’s Roundtable is going to be bullish.


Being bullish or bearish on the amount of uncertainty you think there is going to be in a market price is an opinion. So is doing nothing. For now, from an asset allocation perspective, we’re doing more and more of nothing. As some market prices climb, we’re raising more cash.


This is what the Hedgeye Asset Allocation Model looks like to start off this week:

  1. US Cash: UP to 67% (versus 61% last week)
  2. International Currencies: DOWN to 18%
  3. International Equities: DOWN to 6%
  4. US Equities: UP to 6%
  5. Fixed Income: UNCHANGED week-over-week at 3%
  6. Commodities: DOWN to 0% (in the last 2 wks, I’ve sold all our Oil, Sugar, and Corn – and there are no rules saying I can’t buy them back lower)

Being in cash is a simple concept. While I do get some very complex questions about the nature of my cash position, most of the time the real complexity in the questions is born out of the problems associated with many institutions being mandated to be “fully invested.” I don’t have to be.


To be crystal clear on this, the Hedgeye Asset Allocation Model represents what I am personally doing with my investable capital. I’d be nuts to put my name on any other advice than that which I abide by myself. Again, from a transparency and accountability perspective, this is very simple.


Complex Simplicities: Did I think people who were jamming into bond and gold funds in Q4 of 2010 were nuts? Yes. Do I think people who are fully invested chasing US Equity indices up here are nuts? Yes. Do people who I think are nuts make money in this business? Yes.


But, sometimes (1998, 2000, 2001, 2002, 2008), people who get nutso invested blow up. The goal here, if you’ve made money in each of the last 3 years, is to make it a fourth -  not to implode.


Last week in Global Macro, other than in the $2.8 TRILLION US Municipal Bond Market, not a lot of things blew up. Here were the most important Global Macro market moves of the week:

  1. US Dollar Index was debauched for a -2.4% loss, taking it down for the 2nd week out of the last 3 as Republicans attempt to break spending promises
  2. Euro rallied +3% from its prior week’s lows of $1.29 (where we covered our short) as “I Have A Scheme” (Zero Hedge coined) on fiat paper goes global
  3. CRB Commodities Index closed at another weekly closing-high of 333; Dear Ber-nank, that was another +3.1% inflationary move in 19 commodities
  4. Oil prices inflated +4% week-over-week, and 71% of Americans say it’s an issue – really?
  5. Gold was down -0.6% and down for the 2nd consecutive week (we remain short of gold, GLD)
  6. US stock market Volatility (VIX) dropped another -9.5% to 15.46, testing its April 2010 lows when US growth bulls were last this horned up

There wasn’t enough pin action in credit spreads (US or Sovereign) for me to call it out and nominal US Treasury Yields didn’t do much on a week-over-week basis either (they remain in what we call a Bullish Formation – bullish on all 3 of our core investment durations: TRADE, TREND, and TAIL). That’s one of the main reasons why we love our cash so much. Global Inflation Accelerating is bad for de bonds, eh.


Complex Simplicities associated with our living in a higher-and-lower American society by the week aside, we’re looking forward to watching how this year’s Global Macro picture plays out post the beginning of the year “flows” thing. While in cash, waiting and watching for US stock-centric investors to react to something other than Apples and snow should be, at a bare minimum, worth the immediate-term absolute performance charge.


My immediate term support and resistance lines for the SP500 are now 1277 and 1299, respectively.


Best of luck out there today – it’s good to be back in the game,



Keith R. McCullough
Chief Executive Officer


Complex Simplicities - box


TODAY’S S&P 500 SET-UP - January 21, 2011

Equity futures are trading marginally below fair value following Thursday's continuation of the recent downdraft following some disappointing corporate earnings and on rumors of further tightening moves by the Chinese.  As we look at today’s set up for the S&P 500, the range is 31 points or -1.27% downside to 1264 and +1.15% upside to 1295.



  • Net export sales (cotton, corn, soy meal, soybeans, wheat)
  • 1 p.m.: Baker Hughes rig count, Jan. 21
  • 3 p.m.: Cattle feedlots, Dec.


  • Warner Music hired Goldman Sachs to solicit takeover bids, according to a person with knowledge of co. plans; says Warner was approached by KKR several weeks ago
  • LinkedIn shares are being sold in an auction by secondary exchange SharesPost for $30 apiece, valuing the co. at almost $3b, three people familiar with matter say
  • Employee bonuses at Wall Street banks may be down ~5%-10% this yr, according to compensation advisor Square Mile Services. Morgan Stanley employees are set to find out their bonuses today, while Bank of America will announce bonuses on Jan. 26, according to people familiar with plans
  • IBM is said to be giving hundreds of thousands of non- executive workers $1,000 in stock after co. 4Q beat ests.
  • Advanced Micro Devices (AMD) forecast 1Q rev. ~$1.58b-$1.65b vs est. $1.54b
  • Eli Lilly (LLY) failed to win FDA panel’s backing for Amyvid
  • Emulex (ELX) sees 3Q adj. EPS 8c-11c vs est. 11c
  • Ezcorp (EZPW) reported 1Q adj. EPS 69c vs est. 64c
  • Flextronics International (FLEX) sees 4Q adj. EPS 21c-23c vs est. 21c
  • International Game Technology (IGT) reported 1Q rev. $464.8m vs est. $490.1m
  • Intuitive Surgical (ISRG) reported 4Q EPS $3.02 vs est. $2.25
  • People’s United Financial (PBCT) agreed to buy Danvers Bancorp for $23-shr cash or 1.624 PBCT shrs for each Danvers shr
  • Polycom (PLCM) reported 4Q rev. $340m vs est. $327.8m
  • Tempur-Pedic International (TPX) forecast 2011 EPS $2.60-$2.75 vs est. $2.49


  • Schlumberger Ltd (SLB) 6 a.m., $0.78 
  • Prosperity Bancshares (PRSP) 6 a.m., $0.68 
  • BB&T (BBT) 6:05 a.m., $0.25 
  • Air Products & Chemicals (APD) 6:30 a.m., $1.34 
  • SunTrust Banks (STI) 6:30 a.m., $0.09 
  • First Horizon National (FHN) 7 a.m., $(0.01)
  • Applied Industrial Technologies (AIT) 7 a.m., $0.44 
  • Bank of America (BAC) 7 a.m., $0.21 
  • Airgas (ARG) 7:45 a.m., $0.79


The XLB is still the only sector broken on the Hedgeye TRADE duration - 8 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow (0.02%), S&P (0.13%), Nasdaq (0.77%), Russell 2000 (1.12%)
  • Last Week: Dow +0.96%, S&P +1.71%, Nasdaq 1.93%, Russell +2.51%
  • Year-to-date: Dow +2.12%, S&P +1.80%, Nasdaq +1.94%, Russell (0.71%)
  • Sector Performance - (5 sectors up and 4 declined): - Materials (1.42%), Energy (0.71%), Tech (0.54%), Industrials (0.5%), Healthcare +0.25%, Consumer Disc +0.21%, Consumer Spls +0.51%, Financials +0.49%, Utilities +0.76%


  • ADVANCE/DECLINE LINE: -722 (+945)  
  • VOLUME: NYSE 1190.18 (+9.30%)
  • VIX:  17.31 +3.93% YTD PERFORMANCE: +1.35%
  • SPX PUT/CALL RATIO: 1.65 from 2.28 (-27.83%)


Treasuries were weaker with the better-than-expected economic data and supply overhang.

  • TED SPREAD: 15.30 +0.507 (3.430%)
  • 3-MONTH T-BILL YIELD: 0.16%      
  • YIELD CURVE: 2.82 from 2.77


  • CRB: 331.90 -0.46%  
  • Oil: 89.59 -2.42% - trading +0.44% in the AM
  • COPPER: 427.20 -2.24% - trading +0.01% in the AM
  • GOLD: 1,352.13 -1.37% - trading -0.60% in the AM


  • Gold Set for Worst Weekly Run Since July on China Concern, Holdings Slump
  • Copper Exports From China Triple as Record LME Price Lures Trader Sales
  • Platinum Imports by China Jump in 2010 on Car Sales; Silver Exports Drop
  • Copper May Rise as German Confidence Unexpectedly Gains, Stockpiles Shrink
  • Cotton, Wheat Surge as `Return of Agflation' Outpaces Metals: Chart of Day
  • Palm Oil Futures Advance as Argentine Soybean Crop Gets Insufficient Rain
  • China Rural Incomes Rising Most Since '84 Show Lure for Job-Seeking Obama
  • Crude Rebounds From Two-Week Low as Confidence in Economic Recovery Grows
  • Corn Futures Decline as Price Near 30-Month High Deters Buyers; Soy Falls
  • OPEC Pressured to Lift Output as Africa, Asia Oil at $100: Energy Markets
  • Taurus Quits Silver After Metal Rallies `Too Much,' Sticks With Gold Wager
  • Gold May Advance Next Week as Investors Go `Bargain Hunting,' Survey Shows
  • Deflation Diminishing in Bond Market as Food Prices Increase: Japan Credit
  • Hay Point Coal Shipments Decline 22% Following Queensland Flooding, Rain


  • EURO: 1.3470 -0.07% - trading +0.48% in the AM
  • DOLLAR: 78.823 +0.23% - trading -0.30% in the AM


  • FTSE 100: +0.73%; DAX: +0.60%; CAC 40: +1.16% (AS OF 6:00 AM EST)
  • European markets are trading higher on German business confidence
  • Banks gain on stronger economic outlook.
  • Oil & gas stocks advance on M&A, as crude recovers. Techs gain on earnings.
  • Spanish banks are higher, benefiting from reports the Spanish government is ready to restructure the Cajas by enabling them to become banks and by floating them on the market. Spanish government is also said to be ready to acquire stakes in the Cajas if the market shows little interest in investing. 
  • Royal Bank of Scotland is also higher, on hopes it may leave the government asset protection program.
  • European Macro economic data was mix; Germany January Ifo business-climate index +110.3 vs consensus 110. UK Dec Retail sales (0.8%) m/m vs consensus (0.3%) and prior revised +0.4% from +0.3


  • Nikkei (1.56%); Hang Seng (0.53%); Shanghai Composite +1.41%
  • Asian markets mostly declined today on worries of higher inflation and tightening from China, thanks to a report that an interest-rate hike may be coming within the next two weeks.
  • China, ironically, was the only major regional market to post a gain, with bargain-hunting rife after yesterday’s fall. Banks and property developers advanced, though not as much as they went down yesterday.
  • Energy stocks led Hong Kong down, despite China’s bounce.
  • Taiwan went down 0.75%
  • Energy companies fell on lower oil prices, causing Japan to reverse opening gains.
  • South Korea dropped (1.74%) and Indonesia down (2.16%).

THE HEDGEYE DAILY OUTLOOK - 1 21 2011 6 27 50 AM

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