Empty Stomachs

This note was originally published at 8am on February 07, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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



TODAY’S S&P 500 SET-UP - February 10, 2011

Equity futures are trading below fair value, following equities' lower close on Wednesday, though stocks did finish off session lows. That said, the Dow closed in positive territory, which was its 8th straight gain. After the close, Cisco traded lower, following results for its January quarter, with investors expecting a bit more from results and guidance.


As we look at today’s set up for the S&P 500, the range is 30 points or -1.13% downside to 1306 and +01.14% upside to 1336.



  • 8:30 a.m. Jobless claims Feb. 5, est. 410k, prior 415k
  • 8:30 a.m. Continuing claims Jan. 29: est. 3900k, prior 3925k
  • 8:30 a.m.: Net export sales (cotton, corn, soybeans, soy meal)
  • 10 a.m. Wholesale inventories Dec. est. 0.7%, prior -0.2%
  • 10:30 a.m.: EIA natural gas storage change
  • 12:45 p.m. Fed Atlanta President Dennis Lockhart speaks as part of forum on managing public debt hosted by the Consulate General of Switzerland in Atlanta
  • 1 p.m.: U.S. sells $16b 30-yr bonds
  • 2 p.m. Monthly Budget Statement Jan. est. -$55.0b, prior -$42.6b


  • OPEC Raises Crude Demand Forecast by 400k Barrels a Day
  • President Barack Obama’s budget will include $10.7b to build a nationwide wireless network for emergency workers and $5b to help Americans get mobile access to high-speed Internet service. Obama would pay for the networks with $27.8b from auctioning airwaves relinquished by television
  • Watch Encana after PetroChina agreed yesterday after mkt close to buy 50% stake in its Cutbank Ridge gas assets in Canada for C$5.4b ($5.4b); PetroChina’s largest overseas deal
  • Verizon Wireless stores begin offering iPhone today; analysts say VZ may sell 2m or more of the devices this quarter and draw subscribers from AT&T
  • Credit Suisse falls most since Oct. after cutting ROE target to >15% from >18%. JPMorgan says concerned about CS capital positioning
  • LG Electronics gets accused in two lawsuits by Sony of infringing eight patents for technology used in LCD TVs and monitors; complaints filed in Los Angeles
  • U.S. foreclosure filings fell 17% in Jan. Y/y, fourth straight month of declines, RealtyTrac said
  • Activision Blizzard (ATVI) forecast sees 2011 adj. EPS
  • 70c vs est. 83c
  • Akamai Technologies (AKAM) forecast 1Q rev $265m-$275m vs. est. $283.8m
  • Allstate (ALL) reported 4Q oper. EPS 50c vs est. 86c, rev. $8.09b vs est. $8.04b
  • Amkor Technology (AMKR) forecast 1Q EPS 5c-14c vs est. 22c
  • Cisco Systems (CSCO) sees 3Q non-GAAP EPS 35c-38c vs est.40c
  • Idenix Pharmaceuticals (IDIX) AIDS drug licensed to GlaxoSmithKline was placed on clinical hold by FDA
  • Pacer International (PACR) forecast 2011 EPS of no more than 30c vs est. 39c
  • Questcor Pharma (QCOR) will replace Sonic Solutions on smallcap 600
  • Select Comfort (SCSS) sees 2011 EPS 68c-74c vs est. 66c
  • TriQuint Semiconductor (TQNT) sees 1Q adj. EPS 14c-16c vs est. 20c
  • Whole Foods Market (WFMI) raises FY11 EPS forecast to $1.76-$1.80 from $1.66-$1.71 (Nov. 3), est. $1.71


Fairly sluggish price action throughout much of the day seemed to fit with the lack of meaningful directional drivers.  Nevertheless, we have day 3 of perfect = 9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow +0.06%, S&P (0.28%), Nasdaq (0.29%), Russell 2000 (0.54%)
  • Month-to-date: Dow +2.93%, S&P +2.70%, Nasdaq +3.30%, Russell +3.59%
  • Quarter/Year-to-date: Dow +5.72%, S&P +5.03%, Nasdaq +5.13%, Russell +3.27%
  • Sector Performance: - Energy (1.26%), Materials (0.89%), Financials (0.70%), Tech (0.19%), Healthcare (0.22%), Utilities (0.01%), Industrials (0.01%), Consumer Spls +0.17%, Consumer Disc +0.67%


  • ADVANCE/DECLINE LINE: -721 (-1562)  
  • VOLUME: NYSE 947.16 (+6.87%)
  • VIX:  15.87 +0.38% YTD PERFORMANCE: -10.59%
  • SPX PUT/CALL RATIO: 1.46 from 1.37 (+6.15%)


Treasuries 10-year yields are within 3bps of four-day low before U.S. sells 30-yr bonds and after yesterday’s sale of 10- yr debt drew most demand on record from foreign central banks.

  • TED SPREAD: 18.42 +0.304 (1.680%)
  • 3-MONTH T-BILL YIELD: 0.15% -0.01%
  • 10-Year: 3.65 from 3.75
  • YIELD CURVE: 2.84 from 2.89


  • CRB: 339.43 +0.66%; YTD: +1.99%  
  • Oil: 86.71 -0.26%; YTD: -6.00% (trading +0.17% in the AM)
  • COPPER: 452.40 -1.09%; YTD: +1.44% (trading -0.18% in the AM)  
  • GOLD: 1,363.03 -0.35%; YTD: -4.22% ( trading -0.35% in the AM)  


  • Corn, wheat and soybean futures jumped to the highest since 2008 after a U.S. government report showed smaller crops and rising demand are eroding global inventories as food prices surge.
  • The U.S. Department of Agriculture cut its forecasts for inventories held before this year’s harvests and said world supplies of the crops will slump 2.2 percent. Droughts in Russia, Ukraine and other parts of Europe and adverse weather in the U.S., Canada and Australia slashed output as the world economy rebounded from the most-severe recession in 70 years.
  • Gasoline supplies advanced 4.66 million barrels to 240.9 million last week, the most since March 1990, the Energy Department said. Stockpiles were forecast to climb 2.6 million barrels, according to the median of 16 analyst estimates in a Bloomberg News survey.
  • LME copper stockpiles rose for the first day in four, gaining by 4,375 tons to 396,400 tons, daily exchange figures showed today. The 1.1 percent increase was the largest since Jan 26. Inventories are up 5 percent this year. Orders to draw copper from stocks, or canceled warrants, slid 4 percent to 11,875 tons.
  • Supply concerns sent Arabica coffee futures to their highest price since June 1997 on Wednesday, despite two reports this week that pointed to more coffee on the market.  Bad weather in Colombia, the world's top producer of mild washed Arabica beans, has slashed harvest output for three consecutive years, and the recent report points to a possible recovery. 


Dollar gains vs most peers while euro falls on speculation Bundesbank President Axel Weber’s exit from race to succeed Jean-Claude Trichet as head of ECB will delay rate increase.

  • EURO: 1.3709 +0.31% (trading -0.53% in the AM)
  • DOLLAR: 77.641 -0.46% (trading +0.46% in the AM) 


  • FTSE 100: (0.89%); DAX: (0.43%); CAC 40: (0.87%); IBEX: (2.13) (as of 07:00 ET)
  • European markets open lower and extended declines, currently trading near session lows led by peripheral markets, Spain and Greece down more than 2%.
  • The BOE to leave its benchmark interest rate and QE unchanged
  • Spain's bank hit by comments from Economy Minister saying some will have to raise core capital ratios above a new minimum to aid investor confidence.
  • Plant, machinery output growth in Germany may accelerate this year as Asian demand boosts export orders, VDMA association said in statement earlier today. Production may increase 10% after rising 8.8% in 2010 when adjusted for inflation
  • France Dec Industrial Production +0.3% m/m vs consensus (0.4%)
  • UK Dec Industrial Production +3.6% y/y vs consensus +3.7%; Manufacturing Production +4.4% y/y vs consensus +5.5%


  • Nikkei (0.11%); Hang Seng (1.97%); Shanghai Composite +1.59%
  • Asian markets fall on concern U.S. unemployment and inflation-curbing measures will hamper recovery.
  • Hang Seng decline of 1.97% is most since November.
  • Emerging- market stocks slid for a sixth day.
  • Property and bank shares rebounded from yesterday’s losses in China, leading the market to a gain. For no obvious reason, SAIC Motor Corp jumped by its 10% limit at the very end of the day.
  • ASX surged 5% as stock markets overseas moved to consolidate, raising hopes that Australia will approve the proposed merger with Singapore Exchange.
  • Japan opened to profit-taking ahead of a three-day weekend, though it recovered to finish flat.
  • Hong Kong Exchanges & Clearing failed to join in the regional rally for bourse shares, dropping 5% and dragging the entire market down on worries that yuan-denominated shares may not be introduced as soon as originally thought.
  • South Korea down 1.81%, Korea Gas Corp fell 3% on a report the company is considering reducing its 15% holding in the Gladstone LNG project by two thirds.
  • Japan December core machinery orders +1.7% m/m vs cons +5.3%. January domestic corporate goods price index +1.6% y/y.
  • Australia January unemployment 5.0%, unchanged m/m. January job creation +24K.

Howard Penney

Managing Director



Levi's Tells It Like It Is

Levi’s is one of the largest (privately held) apparel companies that at the same time evades many radar screens of those who solely trade equities.  Nevertheless, the company often provides interesting  and honest insights into its business trends. Last night was no exception, with Levi’s reporting it’s 4Q results.  We believe the company’s candid commentary on the cost environment provides valuable insight into the challenges facing an iconic, cotton-dependent brand such as Levi’s.

  • Despite possessing one of the world’s most recognizable trademarks, the company has launched a new global brand called dENIZEN to address emerging middle market consumers in growing markets.  The brand launched in China in 4Q with 50 doors. India and Singapore also have transitioned doors to the new
  • The company continues to view the economic environment as difficult, especially in Europe.  Southern Europe remains particularly challenged.
  • The market for cotton was described as “unpredictable”.  Increased cotton prices will work their way in the company’s COGS and as a result they’ve taken selective price increases to protect margin and mitigate inflation’s impact.  It was noted that a further increase in cotton prices could negatively impact margins and working capital in the latter part of 2011. 
  • Cotton prices in the back half will have more impact on 2012 than 2011. 
  • Management explained its relationship between Levi's, third-party manufacturers, and denim/textile manufacturers:

"We actually don’t hedge cotton where we buy finished product from our third-party manufacturers. Those manufacturers are buying denim from denim manufacturers, who are essentially buying raw cotton. So, we’re three steps or two steps removed from the actual purchasing cotton or the ability to hedge that. And so our real controls are essentially through pricing, as well as cost controls that run through our supply chain that we manage, which is primarily the third-party manufacturers."

  • When asked about the demand elasticity of their customer base, management noted that it’s too early to judge.  In three months there should be more data for which conclusions can be drawn.
  • The company has not seen customers attempt to increase purchases near-term ahead of further potential price increases. 
  • Spring deliveries which are just now arriving on retail floor are the first products carrying increased costs.
  • Japan continues to be a struggle.   Over the past three years the denim market in Japan has decreased by 40%!

Eric Levine


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In preparation for WYNN’s Q4 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from WYNN’s Q3 earnings release/call.




  • “We’ve seen the bottom in Las Vegas, and I don’t know how fast it’s going to get better, but I don’t think it’s going to get any worse. And we had a really nice October, too. And we had a record-breaking October in China.”
  • [Cotai budget] “It’s a little early for me to say it, but I could say it’s between 2 and $3 billion, probably closer to 2.5, but I’m not sure. I’d like to finish doing the whole takeoff.”
  • “The one segment where I think we’re starting to see more stability that was hardest hit coming into the recession, was the convention and group business. And so we’ve seen that improve. I feel pretty good about moving into next year as to the amount of business that we currently have on the books committed. I mean to give you a comparison last year coming into this year, we had about 35% of our convention room nights on the books, and going into next year we’ve committed about 65% of our convention room nights on the books. So we’re happy to see that that segment’s going to return to somewhere between 18, 19% of our overall occupancy. And also we’re seeing some rate improvement.”
  • [Table game play in Vegas] “Length of play is what’s happening. It’s improved over the last year.”
  • “We’re looking to add two or three more junkets within the next year. We have one actually coming up before the end of the year.”
  • “So what I think a lot of operators do, whether it’s with credit or incentive, which is commission, is they use it for short-term purpose to increase revenue, to increase market share. So, obviously they go hand-in-hand. One is giving more incentive, which is commission back to the customer to bring the business. The second is you need credit, you need to give them facility to get the business. So they use both of them hand-in-hand to gain short-term market share, whether it’s for IPO or they’re trying to do different purpose to gain that short-term market share. However, the danger with that is first, we’re believing stability. Obviously if you give something more away on the commission then you have to cut something back, whether it’s salary or renovation dollars.”
  • [Mass/VIP mix in Macau] “So in the future years to come, we hope that both markets maintain about the same percentage.”

Emerging Markets Are Tightening Monetary Policy, How Are You Positioned?

Conclusion: Seven of ten of the largest emerging market economies are tightening monetary policy.


In the table below, we’ve outlined the largest ten emerging market economies, their 2009 GDP, their most recent CPI reading, and the current monetary stance of their federal banks.  To say that emerging markets are leaning towards tightening their monetary policy, which will lead to slower growth, is an understatement.  Some key takeaways: 

  • In aggregate, the ten largest emerging market economies represent ~$12.7TN in GDP, which is ~21% of global GDP and the fastest growing portion of global GDP;
  • The current average CPI reading for this collection of economies is 6.3%, and only Poland has a reading below 4%; and
  • Of the 10 economies, 7 are currently tightening, 2 are neutral and likely to tighten, and 1 is loosening (albeit in the face of 5%+ inflation). 

In sum, the emerging markets see inflation, are tightening policy, and this doesn’t bode well for the slope of global growth.


Emerging Markets Are Tightening Monetary Policy, How Are You Positioned? - 1


Daryl G. Jones
Managing Director

DSW: Strength Notable on M&A Day

While the focus on DSW is inevitably the company’s merger with holding company RVI, the 4Q same store sales increase of 14.9% should not be ignored.  The overall strength was broad based, but below the surface there are some interesting trends to note:

  • Strength was pretty consistent across the board.  Every single category had comp increases reflecting a continuation of the momentum seen in 3Q.
  • No major fluctuations month to month, with consistency throughout the quarter.
  • Cost increases remain consistent with prior views coming out of the NY Shoe Show.  Expect impact at end of 3Q, early 4Q.  7-12% increase in general with fluctuations between categories.  Getting “nice” results from early spring.
  • Boots were very strong once again, up 16% in 4Q and 57% on a two year basis.  Positive comp increases in December and January for cold-weather product but fashion boots drove the strength.  Strength continues into 1Q.  Expect that 2011 could actually be another strong boot year based on what was shown at Shoe Show. 
  • Not expecting much of an uptick in in-season opportunistic closeouts.  Company did do some pre-buying of inventory to hold for next year.  Management expects this strategy to enable a greater value proposition next year in the rising cost environment.
  • Flat clearance levels year over year in 4Q.
  • Men’s business up 14% in 4Q.
  • DSW will look to hold price on more commodity-like items responsible for bigger volumes overall.  Fashion items will see increases where the value is warranted.

Eric Levine


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