• run with the bulls

    get your first month

    of hedgeye free


Staying On The Line

This note was originally published at 8am on January 27, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Someone has to stay on the line and say, no, we can do this by cutting spending and reducing the size of government.” 

-Chris Christie


Last night, Larry Kudlow had an outstanding interview with New Jersey Governor Chris Christie. For those of you who still care about this country’s currency and long term fiscal health, I think this is the most positive message we can find from a professional politician in America.


I’ll go through the abominations that are the US Federal Budget Deficit and Global Food Inflation in a minute, but first I want to recap what this American patriot is doing about it at the state level. Christie isn’t hiding behind “the depression” or “the deflation.” He doesn’t waste his time fear-mongering  and storytelling like Paul Krugman and Ben Bernanke either – he’s bellying up to the battle field, Staying On The Line, and fighting Big Government Spending:

  1. Cutting Spending – he’s cut 9% of NJ government spending (that’s year-over-year in US Dollars)
  2. Cutting Corporate Taxes – unlike Illinois, which loves commodity inflation and raising taxes
  3. Doing More With Less – his spending is smarter and he’s focused on doing a better job with less

Now we can surely have a debate about how screwed up NJ was relative to the rest of America (dropping the corporate tax rate in NJ takes Christie from the 50th highest state in the Union to #48), but the point here is that we have an American leader who isn’t giving political lip-service to being the change we all want to see in this country.


Delivering on political promises isn’t easy. That goes for operating in the asset management industry too. We’ve institutionalized and bureaucratized America’s corporate and government organizations in this country to a point where Staying On The Line and fighting the Fiat Fool headwind is actually quite hard to do. The self interest associated with personal job security in this environment often trumps long term planning and risk management.


So let’s consider the Captain of this country’s possum plan to cut the deficit by $400B over the next 10 years in the context of this massive entitlement of cheap US Dollars and Big Government Spending:

  1. Analytical Incompetence: The President of the United States’ spending cut plan was based on the wrong base of spending numbers. Immediately after the State of the Union address (where Obama loosely mentioned his $400B plan), the Congressional Budget Office (CBO) raised its 3-year budget deficit forecast by over $1 TRILLION dollars. Yes, $400B in cuts were planned using the wrong denominator of spending.
  2. Deficit Context: Understanding that competent forecasters like Hedgeye Risk Management were already predicting that the CBO’s estimates were 34% too low, this upward revision by the CBO made our estimates look light! Versus the CBO’s August, 2010 estimates (no, that wasn’t too long ago), yesterday’s $3.28 TRILLION 3-year US Budget Deficit forecast was +46% higher! Now you know why Peter Orszag left.
  3. Being off by a TRILLION matters to Global Markets: Yesterday, post the CBO revision and Bernanke’s FOMC statement pandering to the political wind, we saw the currency market press the Burning Bone to fresh 5-week lows and saw one heck of an inflation trade emerge across equity, commodity, and bond markets intraday.

Now some people think this is “all good” – if you’re short bonds like I am, I agree, inflation is good. If you’re long inflation oriented commodities and equities (Energy stocks (XLE) were up +2.4% and Basic Material stocks (XLB) were up +2.1% yesterday), that’s good too.


If you are the other HALF of Americans (155M people) who don’t have positions in any of this stuff (or HALF of the world’s population that depends on rice as their #1 food staple), well – you can just suck it up. By the way, the inverse correlation between the USD and Rice is currently -0.89%.


Some facts on Global Food Inflation trends from this morning’s headlines:

  1. The United Nations “strongly advises” not delaying food supplies to Egypt (whose stock market is down -10.3% this morning), Tunisia, Algeria, Morocco, Yemen, etc…
  2. Bangladesh (that’s another 150M people = the world’s 8th largest population), is DOUBLING rice imports this morning on “panic buying.”
  3. Turkey (72M people) is seeing short-term Turkish debt get hammered this morning on inflation concerns (2-year yields at 7.97%!).

Now why, in all the parameters of American self-interest, would it serve a long-only US-centric equity or commodity portfolio manager to agree with Ben Bernanke and the BLS (Bureau of Labor Statisitics) that there is no inflation?


That answer, and why the only reading in the free world that doesn’t see inflation (Bernanke’s), are pretty obvious…


But do we think that suspending inflation disbelief by using a conflicted and compromised US government person’s inflation calculation will have the unintended consequences associated with Global Inflation Accelerating cease to exist?


Maybe in the very short run…


And in the long run, Big Government Spending Keynesians will tell you we’ll “all be dead”…


“But we should arrange our earthly affairs, for the short run in which we have to live…” (Ludwig von Mises)


Finally, this morning in Davos, ECB Chief Jean-Claude Trichet admitted he’s not going to continue to be as willfully blind to the inflation as The Ber-nank. He told Bloomberg’s Francine Laqua that “we will do what is necessary… our credibility is based on that doctrine.”


Indeed, Mr. Trichet, indeed. The credibility of a nation’s currency depends on it.


And maybe that’s why the Euro continues to strengthen relative to the Debauched Dollar this morning. God knows their sovereign risks are at least as bad as Illinois’… but God also has real-time quotes and sees that the ECB doesn’t have ZERO percent interest rates. Nor does the ECB have the entrenched broken promise of an “independent” US Federal Reserve in lagging all of Asia and Europe from here in raising interest rates to fight inflation.


Whether it’s fighting this US Budget Deficit or the charlatan storytelling that blue-collar and unemployed Americans see no inflation, I salute those American patriots like Governor Chris Christie who are Staying On The Line.


My immediate-term support and resistance lines for the SP500 are now 1288 and 1300, respectively. For the 1st day since January 18th, I tilted the Hedgeye Portfolio back to the short side yesterday. We now have 9 LONGS and 10 SHORTS.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Staying On The Line - cbo


In preparation for the BYI FQ2 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from BYI’s FQ1 earnings release/call and subsequent conferences.



Outlook / Guidance/ Forward looking commentary

  • “We continue to expect annual systems revenue in the range of 220 million to 235 million, with systems revenue weighted towards the back half of fiscal 2011.”
  • “We continue to expect the effective income tax rate for fiscal 2011 will be between 35% and 36.5%. This range does not anticipate extension of the R&D credit nor conclusion of the IRS audit of our 2003 to 2005 income tax returns. In fact, I’m happy to report we have concluded the IRS audit, and we would expect to report a credit later this year.”
  • “We will continue to use our working capital prudently to selectively finance customer transactions, pursue acquisitions and expansion opportunities, and repurchase stock.”
  • “We are beginning to sense some slight renewed optimism from our customers. This, together with positive feedback from our customers and from players in our focus groups about our new games, the ALPHA 2 technology and our new Pro Series cabinets, leads me to expect that this will translate into customer purchases and increases in our ship shares starting in calendar 2011.”
  • “We don’t expect any revenues in Illinois this …fiscal year.”

Product updates

  • “As of September 30, we had placed over 1,200 Cash Spin units, our fastest launch ever, and we haven’t even released this in international markets as yet.”
  •  “Our games there are earning 150% of floor average, clear evidence of an increased demand by players for our games.”
  • “We have received approval for the iDeck and have recently started shipping the Pro Series V22/22 cabinets with the iDeck installed.”
  • “Our games are currently in tests with the Italian regulators, and we expect to be able to begin placing games there in the first half of calendar year 2011.”
  • [Australia and New South Wales] "We expect to begin selling product in that market early in calendar 2011 as well.”

Men of Conformity

“I would rather be a man of conviction than a man of conformity.”

-Martin Luther King, Jr.


When I read, I flag pages and write in them. It’s my way of taking some time to get lost in thought and scribble about what lessons history might provide me in preparation for today. Last night, as I was finishing "The Autobiography of Martin Luther King, Jr.", I found that timeless leadership quote.


It’s certainly not a quote for modern day American politicians. As King goes on to say on page 342, “… there comes a time when one must take a position that is neither safe, nor politic, nor popular, but he must do it because Conscience tells him it is right.”


While I can’t imagine that Presidents George Bush or Barack Obama have a conscience that would lead them to believe that burning America’s currency at the stake is right, there are certainly many Men of Conformity who have been advising them by example of cowardice.


Whether you think Henry VIII clipping his citizenry’s coins caught up to him in the end, or whether you think that modern day American Presidents backing fiscal and monetary policies that debauch America’s dollars will equate to many globally interconnected consequences, no man, woman, or child will ultimately make the call on either. History will. And in this case, I’d rather be the man who sides with history’s lessons.


Before I dig in on the unintended consequences associated with a debasement of the world’s reserve currency, let’s look at what the US Dollar has done across multiple durations:

  1. Immediate-term TRADE (3 weeks or less): down, literally, almost every day since the President’s State of the Union Address and the Fed’s January FOMC statement.
  2. Intermediate-term TREND (3 months or more): up for 7 out of 8 weeks post US Midterm election promises, but down for 5 out of the last 6 weeks on the probability increasing that those promises are broken.
  3. Long-term TAIL (3 years or less): lower-highs and lower-lows -a national embarrassment.

Now if you can show me one man in an American position of fiscal or monetary policy setting power who shows any conviction in backing a strong US Dollar – just one man – I’ll readily accept this claim and consider why he has had no impact on the US Dollar where it matters – on the tape.


If you’ve studied economic history across long-dated cycles (yes, beyond The Ber-nank’s preferred point-in-time academic dogma of the great depression), you’ll already have learned that currency crashes and inflation are globally interconnected risks.


In fact, most modern day risk managers who have read Reinhart & Rogoff’s "This Time Is Different" have learned that there is a pattern that has repeated across 8 centuries of economic data. A simple way to consider this would be to re-read, rethink, and re-learn the lessons Reinhart & Rogoff outline in Part IV – Banking Crises, Inflation, and Currency Crashes where the sequence of chapters are as follows:

  1. Chapter 10 – Banking Crises (America has been there, done that)
  2. Chapter 11 – Default Through Debasement (America bailed some of these currencies (stock prices) out, but the national story is far from over)
  3. Chapter 12 -  Inflation and Modern Currency Crashes (America is in motion on this front – and in some cases, cheering it on)

So rather than reacting to the next country that erupts into social chaos against governments who are lying to them about real-world inflation, my advice would be for both the President of the United States and his Keynesian advisors to do the required historical reading. Remember gentlemen, conviction or not, a successful national currency landing will depend on whether your preparations meet this opportunity.


All is not yet lost. With some conviction and focus, America can arrest the social unrest associated with Global Inflation Accelerating – but this can no longer be willfully neglected. Again, for the 44 million Americans on food stamps, it’s time.


If you don’t think it’s time, take a gander at this morning’s Global Macro grind:

  1. The CRB Commodities Index (19 commodity basket) was up another +1.8% yesterday closing at its highest levels since October of 2008.
  2. Inflation, as measured by the CRB basket, is up +29% since Ben Bernanke opted for Quantitative Guessing II in Jackson Hole, WY.
  3. Dr. Copper is hitting a record high this morning at $4.48/lb (all-time records aren’t deflationary are they Mr. Ber-nank?)
  4. Oil prices are breaking out again to new intermediate-term highs with WTI Oil breaking out above our immediate term TRADE line of $90.21
  5. Food prices, measured by the UN’s basket, continue to hit all-time highs – from corn to rice, yes, this is a crisis for the world’s poor.
  6. South Korea’s inflation rate shot up to +4.1% in JAN versus 3.5% in DEC
  7. Indonesia’s inflation rate continues to rise with CPI for JAN 7.02% versus 6.96% for DEC
  8. Brazil’s CPI is now tracking up +11.5% y/y in JAN versus 11.3% in DEC
  9. Ivory Coast, which is seeing massive inflation in Cocoa prices, became the 1st country to default on their debt overnight ($2.3B in Eurobonds)

And again, for those fans of the Fiat Fools who say this has nothing to do with a humble looking bald man with a beard, that’s just a charlatan’s way of ignoring the math. Here are the refreshed inverse correlations between the US Dollar Index and major global food prices:

  1. Cocoa = -0.91
  2. Wheat = -0.90
  3. Rice = -0.88

Notwithstanding that US farmers are planning to plant the fewest acres of rice since 1989 (they make more money planting things like corn), and the global supply shortages we are seeing associated with flooding and/or countries engaging in revolutions, the simple reality here is that mostly every major food staple in the world is keying off of what the US Dollar does every day – and yes, Mssrs Obama and Bernanke, that Burning Buck stops with you.


My immediate term TRADE lines of support and resistance for the SP500 are now 1276 and 1297, respectively. I remain long of inflation and bought my Sugar (SGG) back in the Hedgeye Portfolio yesterday. Being long inflation also means being short bonds and emerging markets.


Being long inflation is an explicit conviction that the Ben Ber-nank will remain a Man of Washington Conformity.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Men of Conformity - obama

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

CHART OF THE DAY: Men of Conformity & Sponsors of Global Inflation



CHART OF THE DAY: Men of Conformity & Sponsors of Global Inflation -  chart of the day

Egypt and the growing problem of global inflation


TODAY’S S&P 500 SET-UP – February 1, 2011


Equity futures are trading above fair value in a continuation of Monday's gains with geopolitical concerns more than offset by a mix of corporate earnings, ongoing M&A and positive economic data. Overnight, China's PMI data fell to a 5-month low suggesting the government's fiscal tightening policy is starting to filter into the manufacturing component.  As we look at today’s set up for the S&P 500, the range is 21 points or -0.79% downside to 1276 and +0.85% upside to 1297.



  • The ISM factory index probably grew for an 18th consecutive month, to 58 in Jan., and construction spending probably rose 0.1% in Dec., economists said. Due 10 a.m. ISM prices paid, Jan. 73.5, prior 72.5
  • 10 a.m. Construction spending, Dec., est. 0.1%, prior 0.4%
  • 11 a.m.: U.S. buys $1b-$2b TIPS
  • 11:30 a.m.: U.S. sells 4-wk bills
  • 4:30 p.m.: API inventories, Jan. 28
  • 5 p.m.: Domestic vehicle sales, Jan., est. 9.55m, prior 9.46m; total vehicle sales, Jan., est. 12.60m, prior 12.53m
  • 5 p.m.: ABC consumer confidence, Jan. 30, prior -44  


  • Anadarko (APC)4Q adj. EPS 29c vs est. 21c
  • Eastman Chemical (EMN) 4Q EPS miss, sees 1Q EPS above est.
  • Fifth Street Finance (FSC US) will sell 10m shrs
  • Hologic (HOLX) 2Q EPS forecast below est.
  • Hovnanian (HOV) will offer $150m of notes, $50m class A common stock, 3m tangible equity units
  • ICU Medical (ICUI) sees 2011 EPS $2.25 vs est. $2.22
  • Lincoln Electric (LECO) acquired Arc Products. No terms
  • McKesson (MCK) sees 2011 EPS $4.82-$5.02. Est. $4.83
  • Parexel (PRXL) sees 2011 EPS $1.24. Est. $1.27
  • Rent-A-Center (RCII) sees 2011 EPS $2.90-$3.10. Est. $3.01 



5 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND. 

  • One day: Dow +0.58%, S&P +0.77%, Nasdaq +0.49%, Russell +0.75%
  • Month/Quarter/Year-to-date: Month/Quarter/Year-to-date: Dow +2.72%, S&P +2.26%, Nasdaq +1.78%, Russell (0.31%)
  • Sector Performance - (6 sectors up and 3 down): - Energy +2.87%, Materials +1.67%, Financials +0.92%, Industrials +1.14%, Tech +0.62%, Healthcare +0.22%, Consumer Discretionary +0.22%, Utilities +0.22%, and Consumer Staples (0.35%)


  • ADVANCE/DECLINE LINE: 1155 (+3232)  
  • VOLUME: NYSE 1198.78 (-9.42%)
  • VIX:  19.53 -2.54% YTD PERFORMANCE: +10.03%
  • SPX PUT/CALL RATIO: 3.06 from 2.32 (+32.49%)



Treasuries were weaker with slight steepening; 2s10s widened ~4bps

  • TED SPREAD: 15.33 -0.609 (-3.823%)
  • 3-MONTH T-BILL YIELD: 0.15%      
  • YIELD CURVE: 2.84 from 2.82


  • CRB: 341.42 +1.78%  
  • Oil: 92.19 +3.19% - trading -0.79% in the AM
  • COPPER: 445.85 +1.96% - trading +0.44% in the AM
  • GOLD: 1,337.07 -0.45% - trading +0.04% in the AM


  • The Thomson Reuters/Jefferies CRB Index of 19 raw materials extended a rally today to the highest since October 2008. This month, cotton and copper rose to records, while hogs climbed to a 24 year-peak. Adverse weather has slashed global crops, and the U.S. and Europe kept borrowing costs low to bolster economic.
  •  Oil surged to the highest price in more than two years and Brent crude topped $100 a barrel as a seventh day of unrest in Egypt raised concern that supplies may be disrupted. 
  • Copper rose to a record in London after metal inventories had the biggest decline in almost 11 months, signaling demand is redounding in the U.S. 
  • Wheat rose in Chicago for the first time in three sessions as North African and Middle East importers may take advantage of lower prices to build supplies in an effort to keep food prices stable amid political unrest.  Wheat fell 3.6 percent in the two sessions before today.
  • Coffee rose to the highest price since 1997 in New York and reached a 28-month high in London on signs that supplies will fail to keep up with demand.  Stockpiles monitored by the New York Board of Trade fell to 1.64 million bags for Jan. 27, the exchange said the next day.


  • EURO: 1.3738 +0.64% - trading +0.29% in the AM
  • DOLLAR: 77.737 -0.51% - trading -0.35% in the AM


  • FTSE 100: +0.47%; DAX: +0.68%; CAC 40: +0.66%
  • European markets mostly trade higher with the periphery lagging as worries over Egypt took a back seat and sentiment was helped by Wall Street's solid close, firmer markets in Asia and constructive regional economic data.
  • Major indices saw session highs early before modestly paring gains. Advancing sectors lead decliners 17-1, with oil & gas +1.8% (though BP trades lower (1.7%) post its update) and chemicals +1.3% leading gainers and financial services and retail leading laggards trading little changed. US futures trade higher
  • UK Jan house prices (1.1%) y/y vs con (1.0%)
  • Jan Manufacturing PMI, France 54.9 vs con 54.3, Germany 60.5 vs con 60.2, EuroZone 57.3 vs con 56.9, UK 62 vs con 57.9
  • Germany Jan unemployment rate +7.4% vs con +7.5%; jobless change (13k) vs con (10k)
  • UK Dec mortgage approvals 42.6k vs con 47.0k


  • Asian Markets: Nikkei +0.36%; Hang Seng +0.2%; Shanghai Composite +0.3%
  • Most Asian markets edged up to follow Wall Street this morning, as worries about Egypt took a back seat in people’s minds.
  • In Japan, Honda rose on strong earnings.
  • Technology and carmaker stocks rose, but South Korea finished flat.
  • Australia finished flat, though resource stocks gained on higher commodity prices. Australia leaves interest rates at 4.75%, as expected
  • Taiwan is closed until 8-Feb.
  • China January Purchasing Managers Index 52.9 vs December 53.9. January input prices subindex 69.3 vs December 66.7. HSBC January Purchasing Managers Index 54.5 vs December 54.4.

THE HEDGEYE DAILY OUTLOOK - 2 1 2011 6 45 14 AM 

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.