Empty Stomachs

“An empty stomach is not a good political adviser.”

-Albert Einstein


Economic groupthink is dangerous - particularly when its policies perpetuate social stratification. With Global Food Inflation hitting its highest price ever this past week, The People are paying attention. Real-time prices are hard to hide.


The stark contrast between Washington Groupthink and what the rest of the world thinks about the highest food prices ever (yes, ever is a long time) is easily captured by comparing what the United Nations and the Fed had to say about it last week:

  1. United Nations – The Food and Agriculture division of the UN published its Food Price Index on Thursday at an all-time high reading of 231. To put that number in context, it was up +3.4% for the month of January alone and up, sequentially, for the 7th consecutive month. According the Wall Street Journal’s Sameer Mohindru, “the UN’s Secretary of FAO's Intergovernmental Group on Food-grains, said political turmoil in some countries, the weakening dollar” … and “adverse weather conditions...” were to blame.
  2. Federal Reserve – Chairman Ben Bernanke told the National Press Club luncheon in Washington, DC on Thursday that there is no inflation in America and added that food inflation trends have nothing to do with US monetary policy. According to him, food inflation is all about “supply and demand.”

Nope – no mention of “the weakening dollar” or the fiscal and monetary policies in America that affect it - not from The Ber-nank at least...


To the high-society intellectual or ordinary person gifted with common sense, this probably stands out as somewhat odd. To the person with an Empty Stomach, this has to be downright depressing.


So how can the Chairman of the US Federal Reserve say this with a straight face?


The Fed has obviously been completely politicized. Fully loaded with that politicization comes the consummate lack of accountability that’s unique to a professional politician in the modern American Empire. But, this is the kind of thing that makes people really lose whatever trust they had left in government.


Before I go through what happened to the rest of the world’s market prices last week, let’s take a step back and think about the simplicity of a market’s pricing structure:

  1. Supply
  2. Demand
  3. Price

Sure, we agree with Bernanke on supply and demand, but what about price? Without a market price (and the currency that it’s denominated in), you obviously don’t have a market. As Barry Eichengreen writes in the introduction to his outstanding new book on the US Dollar, Exorbitant Privilege: ”The principal commodities exchanges quote prices in dollars. Oil is priced in dollars. The dollar is used in 85% of all foreign exchange transactions worldwide.”


Therefore, when you debauch the value of the world’s reserve currency, you are going to perpetuate world inflation.


If you want to take The Ber-nank’s side on this, you’ll have to ignore the math. As of this morning’s prices, here are the immediate-term TRADE correlations between the US Dollar Index and food prices:

  1. Wheat = -0.91
  2. Rice = -0.90
  3. Sugar = -0.85

*Note: these are extremely high correlations.


There are a lot of ways to prove out how US Dollar sponsored inflation is hurting bond and emerging markets worldwide too. At week’s end, here were the world’s worst performing stock markets for 2011 to-date:

  1. Egypt = -20.9%
  2. India = =12.2%
  3. Tunisia = -10.4%
  4. Philippines = -7.8%
  5. Chile = -6.4%
  6. Brazil = -5.8%

Sure, a Bernanke Bull might quickly point out that 2 of the worst 3 markets have had revolutionary social unrest – that’s the point. Is that what we need to see for governments to pay attention to people who are unemployed with an Empty Stomach?


Some people in the US are trying to say that the US Bond market is getting hammered to new intermediate-term lows because US growth “is back.” Both the Q4 US GDP and January US Employment reports missing consensus estimates notwithstanding, some of it is growth – but some of it is inflation too.


On Friday, we took fresh new lows in US Treasuries as an opportunity to cover short positions in short-term bonds (SHY) and get invested where investors fear having to compete with rising bond yields – we bought a US Treasury Curve Flattener (FLAT) and Utility stocks (XLU). Both were down on the day.


On a week-over-week basis I drew down our Cash position from 67% to 52%. Here’s the updated Hedgeye Asset Allocation Model:

  1. Cash = 52%
  2. International FX = 18% (long Chinese Yuan, CYB)
  3. Fixed Income = 12% (long Inflation Protection and a UST Flattener - TIP and FLAT)
  4. US Equities = 9% (long Healthcare and Utilities - XLV and XLU)
  5. Commodities = 6% (long Oil and Sugar – OIL and SGG)
  6. International Equities = 3% (long Sweden – EWD)

I’m still trying my best to buy things when they are on sale. Having covered my short position in the SP500 on Friday, January 28th at 1276, I’ve moved the Hedgeye Portfolio to 12 LONGS and 10 SHORTS (see all positions below). For the last week, I’ve definitely been getting longer – but that doesn’t mean I think this will end well - nor do I think it will make the 44 MILLION Americans on food stamps have less to worry about in terms of their Empty Stomachs.


My immediate term support and resistance levels for the SP500 are now 1297 and 1319, respectively.


Best of luck out there today



Keith R. McCullough
Chief Executive Officer


Empty Stomachs - vr1


Empty Stomachs - vr2

CHART OF THE DAY: The Dollar Matters to Global Inflation



CHART OF THE DAY: The Dollar Matters to Global Inflation -  chart


TODAY’S S&P 500 SET-UP – February 7, 2011

Equity futures are trading above fair value in a continuation of last week's performance due to further robust economic data, positive corporate earnings and an easing of the social unrest in Egypt.


Copper has hit record levels overnight, which has pushed resource plays higher across Asia and Europe. As we look at today’s set up for the S&P 500, the range is 22 points or -1.06% downside to 1297 and +0.62% upside to 1319.



  • 11 a.m.: Export inspections (corn, soybeans, wheat)
  • 11:30 a.m.: U.S. sells $32b 3-mo bills, $30b 6-mo bills
  • 3 p.m.: Fed. consumer credit, Dec., est. $2.500b, prior $1.346b  


  • American Apparel (APP) named John Luttrell CFO effective today
  • Bank of America (BAC) created Legacy Asset Servicing unit to handle defaulted loans, discontinued residential mortgage products, names Terry Laughlin to lead
  • Bemis (BMS) boosted qtr div to 24c from 23c
  • Broadcom (BRCM) paid Morgan Stanley $300m under accelerated share buyback agreement
  • DuPont (DD) may rise to as high as $65 if the proposed $6.3b acquisition of Danisco boosts its food- related businesses, Barron’s
  • Genzyme (GENZ), Sanofi-Aventis announcement possible as early as today, people with knowledge of talks say. Companies said to be discussing price of ~$74-shr plus potential additional payments
  • InterDigital (IDCC) may rise as much as 15% as demand increases for its network-maximizing technology and as it moves to a new business model, Barron’s said in its “The Trader” column
  • Questcor Pharmaceuticals (QCOR) may drop by >half as the overhaul of the U.S. health-care system slashes earnings for its key product, Acthar, a treatment for baby seizures, Barron’s
  • Starbucks (SBUX) may rise as much as 15% in the next year on “growth initiatives” such as its Via instant coffee, Barron’s reported in its “The Trader” column
  • Terremark Worldwide (TMRK) reported 3Q 23c loss per shr, est. loss 10c; rev. $94.3m, est. $90.8m. Sees 4Q rev. $93.8m-$96.8m, est. $113.6m; 2012 rev. $445m-$455m, est. $423.6m


Only the XLP remains broken on TRADE - 8 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND. 

  • One day: Dow +0.25%, S&P +0.29%, Nasdaq +0.56%, Russell +0.19%
  • Month-to-date: Month-to-date: Dow +1.68%, S&P +1.92%, Nasdaq +2.56%, Russell +2.41%
  • Quarter/Year-to-date: Dow +4.45%, S&P +4.23%, Nasdaq +4.39%, Russell +2.10%
  • Sector Performance - (6 sectors  traded higher): - Tech +0.69%, Consumer Discretionary +0.64%, Consumer Staples +0.58%, Healthcare +0.46%, Industrials +0.35%, Materials +0.01%, Financials (0.05%), Energy (0.26%), and Utilities (0.61%)  


  • ADVANCE/DECLINE LINE: -7 (-275)  
  • VOLUME: NYSE 920.447 (-7.94%)
  • VIX:  15.93 -4.55% YTD PERFORMANCE: -10.25%
  • SPX PUT/CALL RATIO: 1.85 from 1.67 (+11.00%)


Treasuries fall for sixth day, longest losing streak in three months, 2/10 curve nears record as U.S. prepares to sell $72b of notes/bonds over three days starting tomorrow.

  • TED SPREAD: 16.19 -0.457 (-2.747%)
  • 3-MONTH T-BILL YIELD: 0.15% +0.01%      
  • YIELD CURVE: 2.91 from 2.87


  • CRB: 338.92 -0.61%  
  • Oil: 89.03 -1.67% - trading +0.26% in the AM
  • COPPER: 462.90 +0.77% - trading +1.08% in the AM
  • GOLD: 1,347.65 -0.49% - trading -0.03% in the AM


  • The Iranian representative to the Organization of Petroleum Exporting Countries said oil supply and demand in international markets is balanced despite the tension in Egypt.  
  •  San Diego Gas & Electric lifted a natural gas emergency at noon Friday, saying conservation is not essential in the face of warmer weather, better supplies and a forecast for lower use this weekend.
  • Gold declined on speculation that an economic recovery will curb demand for the metal as an alternative investment.  The dollar gained against the euro after a Labor Department report showed the U.S. jobless rate unexpectedly fell to 9 percent in January.
  • Copper extended a rally to a record on mounting concern that the global economic recovery will boost consumption of the metal used in cars, homes and appliances while mining companies struggle to increase output. 
  • U.S. exporters reported sales of 101,000 metric tons of corn to Japan, with 50,500 tons for delivery by Aug. 31 and the rest for delivery in the year starting Sept. 1, the U.S. Department of Agriculture said today in a statement. 
  • U.S. wheat futures on the Chicago Board of Trade fell for a second day on Friday but the market remained poised to show a gain for the week after severe cold in the U.S. Plains helped prices hit 2-1/2-year highs. 
  • Coffee exports from Uganda, Africa’s largest producer of the robusta variety of the crop, fell 18 percent in January, according to the Uganda Coffee Development Authority. 
  • Hundreds of buffalo from America's last great remaining wild herd could be sent for slaughter after being driven from Yellowstone national park by high snow and harsh temperatures, conservationists warned today. 


  • EURO: 1.3546 -0.50% - trading -0.26% in the AM
  • DOLLAR: 78.044 +0.38% - trading +0.23% in the AM


  • FTSE 100: +0.68%; DAX: +0.76%; CAC 40: +0.92%; IBEX: -0.40%
  • European markets trade higher in a broad based advance that saw European shares near a two and a half year.
  • All sectors trade higher buoyed by firmer markets in US and Asia, constructive European corporate news and hopes that talks between Egypt's government and opposition will make progress.
  • Eurozone Feb Sentix sentiment 16.7 vs consensus 12.5 and prior 10.6
  • German December factory orders -3.4% M/m, est. -1.5% (prior +5.2%) 


  • Asian Markets: Nikkei +0.46%; Hang Seng (1.49%); Shanghai Composite (closed)
  • Asian markets traded mostly higher, with investor sentiment aided by Friday's gains in the US as the job market showed further signs of recovery.
  • Markets in China, Taiwan and Vietnam remain closed for Lunar New Year.
  • Australia; Dec retail sales were below consensus in December, +0.2% over the period incorporating Christmas, after a revised +0.4% gain in November.
  • Hong Kong stocks fell into the close with oil stocks leading the way down hit by lower crude prices.
  • Bank of Japan Governor Masaaki Shirakawa said to overcome deflation in Japan, two things are essential, consistent monetary easing and efforts to strengthen the foundation for economic growth. Mr. Shirakawa also said that recent economic indicators show that Japan's economy is about to emerge from its recent pull back.

Howard Penney

Managing Director

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MGM should beat for the first time in a while. Q1 looks good too. That may be when the good times end.



MGM should beat the Street (earnings release: February 14th) and be very bullish (like every quarter) about 1Q2011.  We’re 7% ahead of the street on EBITDA for 4Q2010.  We’re close to Street estimates for all regions aside from Macau where we believe MGM will materially exceed investors’ expectations.


Q1 faces a very easy comparison, especially on the convention side.  MGM will focus on this during their conference call and analysts’ will likely raise expectations.  Will the good times last?  We don’t think so.  We’re looking for a Q2 hangover and remain well below the Street for 2011 EBITDA despite higher Q1 projections.


Here is the detail of our Q4 projections:



  • We project Las Vegas Strip revenues and EBITDA of $1.15BN and $248MM, respectively
    • RevPAR up 1% with larger increases at Bellagio, Mandalay Bay, and Circus Circus and declines at Monte Carlo, NY NY, and Luxor
    • Extrapolating on a continuation of the trends we saw in 3Q2010, we expect big EBITDA YoY increases at a few properties
      • Bellagio +26%
      • NY NY +14%
      • Monte Carlo +45%
      • Circus Circus +81%
    • However, some properties should see continued EBITDA declines
      • Mandalay Bay -9%
      • Luxor -5%
      • Excalibur -2%
  • MGM Grand Detroit revenues and EBITDA are estimated at $132MM and $38MM, respectively
    • Casino revenues of $144MM
    • Fixed operating expenses of $66MM
  • We expect a monster quarter out of MGM Macau, projecting $120MM of EBITDA; we’re 27% ahead of consensus
    • The only qualifier here is if the property takes a big reserve against roughly $100 million owed by a large junket
    • Slot win of $42MM
    • VIP Table drop of $19.5BN, hold of 3.1%
    • Mass win of $124MM
  • Excluding condo sale revenues and forfeitures, we project CityCenter revenues and EBITDA of $235MM and $26MM, respectively.
    • Adjusted for 3Q high hold, clean EBITDA would have been $14MM at Aria
    • $153 RevPAR at Aria
    • $98MM of casino revenue at Aria
  • We expect Borgata to report flattish YoY results with revenues and EBITDA of $175MM and $35.6MM, respectively.
    • $97MM in slot revenues
    • $47MM of table revenues, a 12% YoY decline due to an 8% decrease in drop and lower hold
    • Flat YoY expenses at $139MM