Notable news items/price action moves from Friday’s trading

  • RRGB holder, Oak Street Capital Management LLC, seeks additional board nominees.  Oak Street also sought a temporary moratorium on new unit expansion and a buyback of shares.
  • YUM is facing legal action after a class-action lawsuit was filed against Taco Bell over the “beef” it uses as food and advertises as such.  The lawsuit alleges that the “beef” is, in fact, a concoction with multiple fillers”.
  • SBUX is still in disagreement with Kraft over the termination of their distribution agreement.  SBUX has been highlighting diminished market share as a result of Kraft’s mismanagement.  Kraft’s general counsel has stated that market share “has no bearing on the question of whether they have the right to terminate and walk away for nothing on their own timetable”.
  • CMG faced protesters at one of its downtown Minneapolis restaurants in response to having fired a number of employees after an audit by the U.S. Immigration and Customs Enforcement agency. Eight protesters were cited for trespassing.
  • RT insider selling news – Grant Kimberly, Vice President, filed to sell ~19k shares.
  • COSI 4Q10 sales results were strong; company-owned restaurants saw comparable store sales increase 6.1%
  • In a quiet day of trading for restaurant stocks, the most notable moves were CAKE (up 1% on accelerating volume) and BWLD (declining -3.6% on accelerating volume). 



Howard Penney

Managing Director


TODAY’S S&P 500 SET-UP - January 24, 2011

Equity futures are trading marginally above fair value ahead of a very busy week for corporate earnings, key speeches and a number of macro releases. Among highlights, President Obama makes his State of the Union address tomorrow and on Wednesday the FOMC's holds its first meeting in 2011.  The World Economic Forum kicks off in Davos on Wednesday and around 120 S&P 500 companies are scheduled to report earnings.  As we look at today’s set up for the S&P 500, the range is 28 points or -1.27% downside to 1267 and +0.91% upside to 1295.



  • 11 a.m.: USDA export inspections (corn, soybeans, wheat)
  • 11:30 a.m.: U.S. sells $29b 3-mo. bills, $28b 6-mo. bills


  • Apple (AAPL): Fred Alger Management CEO Dan Chung sees AAPL reaching $500-shr as corporate customers buy the iPad for business applications and international sales increase, Barron’s “Trader” column reports
  • Berkshire Hathaway (BRK/A, BRK/B) may begin paying dividend of 2% or less in next 12-18 months as available cash increases, Barron’s reports
  • Citigroup (C) raised CEO Vikram Pandit’s base salary to $1.75m from the $1 he earned for each of past two years
  • Genomic Health (GHDX) presented data that supports the use of its Oncotype DX test in some colon-cancer patients
  • Navigators Group (NAVG) sees 4Q charge of $9.2m related to GoM spill
  • (CRM) may fall 20% or more on rising expenses and a growing number of diluted shares outstanding, Barron’s reports, without citing anyone
  • Southwest Airlines (LUV) in tentative agreement with US Airways to extend Philadelphia airport leases by two years


  • Bank of Hawaii (BOH) 7 a.m., $0.69 
  • Steel Dynamics (STLD) 7 a.m., $0.09 
  • Wintrust Financial (WTFC) 7 a.m., $0.20 
  • Halliburton (HAL) 7:04 a.m., $0.63 
  • Sealed Air (SEE) 7:30 a.m., $0.45 
  • McDonald’s (MCD) 7:58 a.m., $1.16 
  • Swift Transportation Co (SWFT) PreMkt, $(0.05)
  • Woodward Governor (WGOV) 4 p.m., $0.39
  • CSX (CSX) 4:01 p.m., $1.09
  • FNB/PA (FNB) 4:01 p.m., $0.14
  • VMware (VMW) 4:01 p.m., $0.44
  • Sanmina-SCI (SANM) 4:02 p.m., $0.41
  • Albemarle (ALB) 4:06 p.m., $0.88
  • Amgen (AMGN) 4:06 p.m., $1.11
  • American Express Co (AXP) 4:08 p.m., $0.97
  • Zions Bancorp (ZION) 4:10 p.m., $(0.36)
  • Cathay General Ban (CATY) 4:30 p.m., $0.13
  • Packaging of America (PKG) 4:30 p.m., $0.53
  • Texas Instruments (TXN) 4:30 p.m., $0.63
  • STMicroelectronics (STM) 5 p.m., $0.24
  • Crane (CR) 5:10 p.m., $0.65
  • Equity Lifestyle Properties (ELS) PostMkt, $0.72
  • RLI (RLI) PostMkt, $0.98
  • SL Green Realty (SLG) PostMkt, $0.89


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

  • One day: Dow +0.41%, S&P +0.24%, Nasdaq (0.55%), Russell (0.63%)
  • Last Week: Dow +0.72%, S&P -0.76%, Nasdaq -2.39%, Russell -4.26%
  • Year-to-date: Dow +2.54%, S&P +2.04%, Nasdaq +1.38%, Russell (1.34%)
  • Sector Performance - (6 sectors up and 3 down): - Industrials +0.81%, Financials +0.81%, Energy +0.53%, Consumer Discretionary +0.24%, Healthcare +0.09%, Consumer Staples +0.17%, Utilities (0.09%), Materials (0.25%), and Tech (0.58%)


  • ADVANCE/DECLINE LINE: 151 (+873)  
  • VOLUME: NYSE 1265.93 (+6.36%)
  • VIX:  18.47 +2.67% YTD PERFORMANCE: -4.06%
  • SPX PUT/CALL RATIO: 1.57 from 1.65 (-4.71%)


Treasuries were stronger, especially in the belly of the curve, as buyers mentioned Thursday's selloff as "overdone".

  • TED SPREAD: 15.51 +0.203 (1.327%)
  • 3-MONTH T-BILL YIELD: 0.16%      
  • YIELD CURVE: 2.81 from 2.82


  • CRB: 334.80 +0.66% (+0.36% last week)  
  • Oil: 89.11 -0.54% - trading -0.82% in the AM (-3.74% last week)
  • COPPER: 430.90 +0.87% - trading +0.43% in the AM (-2.33% last week)
  • GOLD: 1,343.55 -0.64% - trading +0.23% in the AM (-1.15% last week)


  • Cocoa Jumps Most Since 2008 in London Following Ivory Coast Ban on Exports
  • Metals Traders Worth $3 Million Amid Shortages as Wall Street Pay Shrinks
  • Ivorian Export Ban May Drive Up Cocoa Prices 10%, Hackett Financial Says
  • Copper Climbs in London Trading on China's Demand, Recovery in Europe
  • Wheat Extends Advance to Five-Month High as La Nina Threatens Global Crops
  • Gold Advances as Longest Weekly Losing Streak Since July Prompts Purchases
  • Cooking Oil Imports by India May Decline in First Two Months, Patel Says
  • Bullish Gold Bets by Funds Slump on Worst Price Slide Since Start of 1997
  • Cotton Soars by Daily Limit on Signs Global Supply May Fail to Meet Demand
  • Rubber Advances to Record as Persistent Rains May Threaten Thai Production
  • Natural Gas Producer Bearish Bets Jump to Three-Year High: Energy Markets
  • Oil Drops in New York After Saudi Arabia's Al-Naimi Signals More Supplies
  • Sugar Output by Kakira, Uganda's Biggest Producer, May Climb 13% This Year
  • Hedge Funds Cut Bullish Cotton Bets to Lowest Level Since July After Rally


  • EURO: 1.3621 +1.12% - trading -0.46% in the AM (+1.74% last week)
  • DOLLAR: 78.213 -0.77% - trading +0.24% in the AM (-1.20% last week)


  • FTSE 100: +0.14%; DAX: -0.65%; CAC 40: -0.26% (AS OF 6:45 AM EST)
  • European markets are trading mixed following disappointing Q4 earnings from Phillips Electronics.
  • Ireland up 0.72% as the date of the general election will be brought forward following the decision of the Green Party to pull out of Government.
  • Manufacturing and Services PMI numbers across Europe for January continued to show signs of growth though some numbers were below consensus.
  • Eurozone Final Manufacturing PMI 56.9 vs consensus 57
  • Eurozone Final Services PMI 55.20 vs consensus 54.30
  • Germany Jan preliminary Manufacturing PMI 60.2 vs consensus 60.9
  • France Jan preliminary Manufacturing PMI 54.3 vs consensus 56.9
  • ECB President Jean-Claude Trichet signals in WSJ interview that bank won’t react to temporary jump in inflation caused by higher commodity prices as long as it doesn’t fuel wage increases. Says benchmark interest rate remains “appropriate” at record low 1%. Story
  • Portugusese Economy Minister Jose Antonio Vieira da Silva tells El Mundo newspaper the country doesn’t need a bailout
  • Greek Finance Minister George Papaconstantinou reiterates Greece doesn’t need to restructure EU300b of debt


  • Asian markets are blowing up one by one; Thailand down -4.3% last night, joining China, India, and Indonesia as markets get hammered by inflation.
  • Indonesia down another full 1% last night and is now -10% for 2011.
  • Japan rose +0.69% on bargain-hunting, especially for resource stocks. Honda rose 4% on news it will start producing at a new plant in Argentina in March and a broker upgrade.
  • Miners and banks led Australia up +0.69. Australia Q4 PPI +0.1% seq vs +0.7% consensus, +2.7% y/y vs +3.3% consensus.
  • On fears of a rate hike in China, Hong Kong declined 0.31%, as falls in resource and insurance shares outweighed rises in property developers and local banks.
  • Banks and small caps took China down -0.72% on worries that a rate hike is coming very soon.


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The Week Ahead

The Economic Data calendar for the week of the 24th of January through the 28th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - lac1

The Week Ahead - lac2

Treasury Supply Set to Increase . . . By Trillions

This note was originally published January 21, 2011 at 15:46 in Macro


Conclusion: We believe U.S. Treasury issuance over the coming three years could be ~34% higher than expectations.  Increasing supply is bad for price.


Position: Short Treasuries via the etf SHY


On a very basic level, supply and demand set the market price for any good, commodity, or product that is “traded”.  So, as supply increases, demand must match it, or price will decline.  Obviously in practice, especially when trading the global financial markets, it is slightly more complicated.  That said, large moves in either future demand or future supply still do matter.  As it relates to Treasuries, we believe future supply will be much higher than consensus expects primarily because the U.S. deficit will be higher than expected.


Currently, the Congressional Budget Office (CBO), which we consider consensus for this purpose, projects that the federal budget deficit for 2011, 2012 and 2013 will be $-1,066BN, $-665BN, and $-525BN, respectively.  This is a combined deficit of $-2.3TN.  (Yes, that is a big number.)  So, all else being equal and setting aside any maturities, the United States will have to issue $2.3TN in treasuries to fund the CBO’s projected budget deficit over the next three years.  So if we accept that there is ~$14TN in government debt outstanding (Source:, then the outstanding government debt over the next three years will grow 16%.   That is, supply is going up.  Given this outlook, it does make sense that interest rates on 30-year Treasuries are moving higher, as noted in the chart below.


Treasury Supply Set to Increase . . . By Trillions - 1


Interestingly, we think that the CBO’s budget deficit projections are low, and perhaps meaningfully so. Currently Hedgeye’s U.S. budget deficit projections for 2011, 2012, and 2013 are $-1.2TN, $-1.0TN, and $-0.9TN, respectively.  Combined, this is a total deficit for the ensuing three years of $3.1TN.  In aggregate, our projections are $800BN more than the CBO, or 34% higher for the three year period.  The implication being that the issuance of U.S. Treasuries may be almost 34% higher than “consensus” expects over the coming three years.  No doubt some of this is priced in, but our models have supply growing at an accelerated rate relative to what is likely priced in. And the questions remains, who is going to buy these treasuries?


Increasingly, of course, foreigners will have to buy more Treasuries, which is geopolitical risk for U.S. sovereignty.  We highlighted this risk in an Op-ed to Canada’s Globe and Mail, where we wrote:


“Dependence on foreign oil is a real economic and strategic risk for the United States, but what about the risk related to its dependence on foreign debt financing? The combination of a low domestic savings rates and lack of government savings (that is, a massive deficit) means that the U.S. will continue to rely on foreign financing to bridge deficits well into the future.”


As we reviewed the most recent TIC data, it is clear that the amount of foreign buying is increasing.  In fact, foreign ownership is up 16% y-o-y.  So, which nation is buying all this U.S. debt.  Well, the answer is unclear.  In the chart below, we’ve highlighted the nation that appears to be buying the bulk of his new issuance . . . the United Kingdom.  “UK Holdings” has increased their holdings of U.S. Treasury Securities by $356BN year-over-year, which is growth of 229%! In reality, it isn’t the United Kingdom buying the Treasuries, but other sovereignties buying debt through the United Kingdom.  Most likely the Chinese, who have to continue to buy U.S. dollar paper to maintain their exchange rate at parity.


Increasingly as the U.S. funds its deficit with more Treasury issuance, investors will undoubtedly demand higher rates.  Along with this, if the Chinese are indeed saying one thing, that is questioning the value of Treasuries, but continuing to buy via “UK Holdings” then the global market for U.S. Treasuries becomes even murkier, which can’t be positive for price.


Daryl G. Jones

Managing Director


Treasury Supply Set to Increase . . . By Trillions - 2

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