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Delicious Privileges

“That most delicious of all privileges – spending other people’s money.”

-John Randolph


After reviewing this Disaster Deficit proposal put forth and watching the political theatre associated with delivering it from an American classroom yesterday, I re-shorted the US Dollar and sold out entirely of the 3% in US Treasury denominated Fixed Income I had left.


Since professional politicians from George Bush to Barack Obama clearly don’t have it in them to stop spending other people’s money, the only way to Govern the Government from here on in is going to have to be the old fashioned way - voting with our wallets.


The aforementioned quote came from a Congressman in Virginia (who served between 1) most commonly remembered as John Randolph of Roanoke. I am calling out his thoughts because they pertained to the constitutionality of the US government’s concentration of power. Standing up against the tyranny of central planning is not a new idea in America this morning. I’m just reminding you where we came from.


In the coming weeks I am going to focus on the history of both US monetary and fiscal policy. I’ll be drawing most specifically on a recently published book that I’m two-thirds of the way done by Barry Eichengreen titled “Exorbitant Privilege” which focuses on the history of the US Dollar, other modern day fiat currencies, and the politicization that supports them.


The idea of Delicious or “Exorbitant Privilege” shouldn’t be foreign to any human being. Depending on which part of this world that you live, you may actually call into question the US Dollar having the privilege of being the world’s most recent reserve currency. As Eichengreen reminds us,


“This has long been a sore spot for foreigners, who see themselves as supporting American living standards and subsidizing American multinationals through the operation of this asymmetric financial system.”


Why have I been so intensely focused on how modern day fiscal and monetary policies affect the US Dollar for the past 3 years? That’s simple. Staying ahead of the big draw downs in the US Dollar’s price over the course of the last 3 years has protected my clients and firm from being long massive bubbles in US Equities (2008) and US Treasuries (2010).


Until the huge correlation risk to what the US Dollar Index does every day burns off (and, God willing, it eventually will), I won’t stop weighing the US Dollar as the #1 factor in my 27-factor global macro risk management model.


Unlike whatever models Greenspan and Bernanke have been using for the last 10 years, mine has had some credibility in calling out big Global Macro risks before they become consensus. We introduced the Hedgeye Macro Theme of Global Inflation Accelerating in October of 2010 – today the #1 headline at one of the world’s key lagging economic indicators, The New York Times, is “Companies Raise Prices As Commodity Costs Jump.”


Having authored the inflation theme 5 months ago, I think we have as good a shot as the next Thunder Bay Bear to call a rollover in inflation – or to appease The Ber-nank fans, maybe we’ll call it The Deflation of The Inflation…


Just because inflation concerns are now a global consensus doesn’t mean that they can’t remain. I think the #1 factor in determining where inflation goes from here is where the US Dollar Index goes from here.


So, to keep this globally interconnected game of Chaos Theory very simple:

  1. If the US Dollar is debauched from here, I think Global Inflation will continue to accelerate
  2. If the US Dollar is resuscitated from here, I think Global Inflation readings will decelerate

As a reminder, the way we Chaos Theorists measure risks in macro markets is on the slope. Many Big Government Interventionists don’t even know what that means. Being historians and socials scientists can indeed provide impediments to understanding mathematical thoughts.


Another way to talk about slopes, sequential rates of change, and the risk management signals embedded therein is to simplify it – so Barney Frank and John Boehner please repeat after me – what happens in macro happens on the margin… what happens in macro happens on the margin…


Good. With that trivial math lesson in hand, all we need to give America’s professional politicians are some lines and charts for the US Dollar Index:

  1. TAIL (long-term) resistance = $81.66 (that’s the line you’ll need to challenge to overcome your credibility issues)
  2. TREND (intermediate-term) resistance = $78.98 (that’s the line you’ll need to watch day-to-day during the Deficit and Debt Ceiling Debates)

Now, on the topic of the US Debt Ceiling Debate, going all the way back to that prickly little critter that American folks like John Randolph were so focused on – the US Constitution – I’d be remiss not to remind the current Treasury Secretary of the United States of America that it wasn’t until 1917 that Congress gave the US Treasury discretion to issue debt…


That’s right – from 1787 to 1917 is a fairly long time. And we’re pretty sure that the decision in 1917 didn’t have anything to do with Presidents Bush and Obama giving prime time PR speeches from our children’s classrooms to justify deficit spending. The idea behind the issuance of US Treasury debt was grounded in protecting the American people during a time of war, not in protecting government from the people.


My immediate term support and resistance lines for the SP500 are now 1318 and 1337, respectively. As the implied default risks associated with US deficit spending and debt issuance continue to be reflected in higher US Treasury Yields, we now have a ZERO percent asset allocation to UST bonds.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Delicious Privileges - ja1


Delicious Privileges - ja2

CHART OF THE DAY: The Global Currency and Bond Markets are Voting with Their Wallets



CHART OF THE DAY: The Global Currency and Bond Markets are Voting with Their Wallets -  chart


After all the optimistic talk about a Vegas recovery, MGM reported a weak Q4. However, all eyes are on Q1 which is off to a good start.



We have to admit that MGM’s Q4 was pretty disappointing on the Strip.  MGM Macau produced a fantastic bottom line that even exceeded our Street high estimate.  However, we thought we would’ve seen a progressively better performance on the Strip.  Instead, RevPAR trends actually worsened a little from Q3.  MGM missed our EBITDA projections at most of their Strip properties.


Alas, the stock market is a forward looking entity and investors have collectively decided to judge MGM on Q1 trends.  That is why the stock was only down 3% yesterday.  We’ve also been focused on Q1 and management commentary was very positive about January trends.  1Q RevPAR is going to be up at least 10% and January was up double digits.  Management will also be meeting with investors this week and their ability to promote their stock should not be underestimated.  Apparently, as we heard on the call last night, MGM as an inflation hedge may be part of that pitch.




  • RevPAR trends look like they got sequentially worse from Q3 to Q4 at most Vegas properties. According to our weighted average calculation, RevPAR decreased 4.3% in 4Q vs. 2.3% in 3Q:
    • ADR was down 2% in 4Q vs. only .5% in 3Q
    • Occupancy was down 1.9% in 4Q vs 1.7% in 3Q
  • RevPAR decreased at most Strip properties aside from Mirage which saw a 2% lift
  • Casino and other revenues also declined YoY at most Strip properties aside from some lower tier properties, including:
    • Mandalay Bay: +3%
    • NYNY: +7%
    • Monte Carlo: +17%
  • Total Strip expenses declined 2.5%, compared to a 2% decline in 3Q10
  • Beau Rivage’s D&A expense went from $12MM in 3Q to $2MM in Q4 due to a one-time benefit.  This wasn’t discussed in the release or conference call.
  • City Center:
    • Aria: we assume that if hold was 21%, then table drop was flat with 3Q at around $340MM and that slot revenue was around $32MM. With total rebates of about 5% of gross gaming revenue
    • Aria had $40MM of promotional expense which amounts to 40% of casino revenue or 16% of gross property revenue
    • We think FTE’s are around 5,700 down from 6,300 in 1Q2010
    • Total operating expenses at Aria $168MM vs. $178MM last quarter and an average quarterly run rate $175MM in 2010
    • Total CC revenues – excluding residential, was $231MM compared to 3Q revenues of $247MM, 2Q revenues of $214MM and 1Q revenues of $179MM
    • Total CC expenses - excluding residential, were $215MM compared to $221MM in 3Q2010
  • MGM Macau results were truly impressive. While they don’t disclose a lot detail, here are some of our estimates
    • Slot win of $42MM
    • VIP Table drop of $19.5BN, hold of 3.1%
    • Mass win of $124MM
  • D&A declined for the 9th consecutive quarter as the company continues to under invest in its assets

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Notable news items/price action from the past twenty-four hours.

  • CMG downgraded to Neutral from Outperform at Cowen.
  • CMG’s new ShopHouse Southeast Asian Kitchen name finally hit the mainstream yesterday.  Sell-side analysts clamored to take credit for being first.  Hedgeye readers knew of the name when we posted on it on 1/27.
  • GMCR gained 6.6% on low volume.  The speculation embedded in this move is – as I have been writing ad nauseum – misplaced.  See my posts yesterday and my first post on the SBUX/GMCR story from January.   Keybanc upgraded the stock to a Buy from Hold this morning. 
  • PNRA was cut to Outperform from Strong Buy.
  • SBUX CEO Howard Schultz made $36.8 million last week by exercising and selling stock options set to expire in the fall.
  • DPZ’s U.K. & Ireland PLC said full-year profit fell on a one-off credit charge.   The company may pass on a 1 to 2% increase in food costs to franchises this year, according to CFO Dale Ginsberg.  
  • Former McDonald’s executive Mike Roberts is now the CEO of LYFE, a new fast food chain with options for vegans and vegetarians. 
  • BWLD gained on accelerating volume on a day of insider selling.
  • EAT declined on accelerating volume.
  • YUM gained on accelerating volume.



Howard Penney

Managing Director


TODAY’S S&P 500 SET-UP - February 15, 2011

Equity futures are trading narrowly below fair value following another inconclusive performance on Monday as markets struggle for direction. As we look at today’s set up for the S&P 500, the range is 14 points or -1.07% downside to 1318 and zero upside to 1332.



  • 8:30 a.m.: Empire manufacturing survey, Feb., est. 15, prior 11.92
  • 8:30 a.m.: Import price index, Jan., est. 0.8% M/m, prior 1.1%
  • 8:30 a.m.: Advance retail sales, Jan., est. 0.5%, prior 0.6%; ex. autos & gas est. 0.4%, prior 0.4%
  • 9 a.m.: Total net TIC flows, Dec., est. $43.7b, prior $39.0b; long-term TIC flows
  • 10 a.m.: Fed’s Sandra Pianalto speaks on economy in Akron, Ohio
  • 10 a.m.: Fed’s Daniel Tarullo testifies on derivatives regulation
  • 10 a.m.: Business inventories, Dec., est. 0.7%, prior 0.2%
  • 10 a.m.: NAHB housing market index, Feb., est. 16, prior 16
  • 11:30 a.m.: U.S. sells 4-week bills
  • 4:30 p.m.: API inventories, Feb. 11
  • 5 p.m.: ABC consumer confidence, Feb. 13


  • Boards of Deutsche Boerse and NYSE Euronext plan to vote this morning on whether to combine the cos., according to a person with direct knowledge of the matter
  • ASX and Singapore Exchange agreed to change composition of board of proposed merged co. in order to win regulatory approval; would include five Australian and five Singaporean citizens among its 13 members
  • Zynga is in talks to raise funding from T. Rowe Price Group and Fidelity Investments at a valuation of close to $10b, two people familiar with the matter say
  • GE and a JV partner are seeking to sell GE SeaCo container leasing unit for ~$2.5b, FT reports, citing people familiar with matter
  • Watch Marriott after it said post-close it plans to spin off timeshare business in tax-free dividend in late 2011. Co. also reported 4Q adj. EPS 39c vs est. 36c
  • GM CEO Dan Akerson says co. will boost investments in China and roll out > 20 new and upgraded models in the country by 2012
  • Credit-card monthly charge-offs reported


The XLU broke TRADE - 8 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow (0.04%), S&P +0.24%, Nasdaq +0.28%, Russell +0.46%
  • Month-to-date: Dow +3.16%, S&P +3.59%, Nasdaq +4.34%, Russell +5.72%
  • Quarter-to-date: Dow +5.97%, S&P +5.94%, Nasdaq +6.19%, Russell +5.39%
  • Sector Performance: - Energy +2.20%, Materials +1.08%, Healthcare +0.34%, Tech +0.14%, Financials +0.05%, Industrials (0.11%), Consumer Discretionary (0.40%), Consumer Staples (0.44%), and Utilities (0.72%)


  • ADVANCE/DECLINE LINE: 321 (-1132)  
  • VOLUME: NYSE 817.23 (-15.92%)
  • VIX:  15.95 +1.66% YTD PERFORMANCE: -10.14%
  • SPX PUT/CALL RATIO: 2.09 from 1.84 (+13.68%)


Two-yr treasury yield is near highest in > 8 months before U.S. retail sales data expected to show recovery is gathering pace.

  • TED SPREAD: 19.03 -1.420 (-6.947%)
  • 3-MONTH T-BILL YIELD: 0.13% +0.01%
  • 10-Year: 3.62 from 3.64
  • YIELD CURVE: 2.75 from 2.79


  • CRB: 338.67 +0.26%; YTD: +1.78%  
  • Oil: 84.81 -0.90%; YTD: -7.47% (trading +0.58% in the AM)
  • COPPER: 463.75 +1.99%; YTD: +4.02% (trading -0.46% in the AM)  
  • GOLD: 1,364.85 +0.56%; YTD: -3.20% ( trading +0.61% in the AM)  


  • President Barack Obama proposed user fees as an option to help the Commodity Futures Trading Commission carry out derivatives oversight as part of a $308 million budget request for the agency. 
  • Brent has outpaced New York futures, widening the difference between the prices for April delivery to more than $14 a barrel, as unplanned outages cut European supplies.  Gasoline for March delivery gained 5.22 cents, or 2.1 percent, to settle at $2.5174 a gallon, and heating oil for March climbed 5.46 cents, or 2 percent, to $2.7504 a gallon. 
  • Copper rose to a record in London after imports increased in China, the world’s largest metal consumer.  Data from China’s customs agency showed that imports in January surged 25 percent from a year earlier and 5.7 percent from December. Copper prices are up 61 percent since July 1. 
  • Corn and soybean futures fell on Monday as the U.S. government's first forecast of crops in the United States this year exceeded expectations, leading traders to reduce exposure in the markets. 
  • Wheat prices extended a rally to the highest since 2008 on signs that political tension in the Middle East and North Africa is spurring governments to boost grain imports, while drought threatens the crop in China.
  • Coffee prices rose today, extending a rally to the highest since 1997, as inventories tallied by an industry group remain close to a 40-year low. 
  • Rubber advanced to a record amid speculation that China, the largest consumer, may step up buying to rebuild stockpiles before the low-production period begins in major growing areas in Thailand.


  • EURO: 1.3497 -0.42% (trading +0.21% in the AM)
  • DOLLAR: 78.614 +0.20% (trading -0.26% in the AM) 


  • FTSE 100: (0.01%); DAX: +0.19%; CAC 40: +0.40% (as of 06:45 EST)
  • European markets have traded in a relatively narrow range either side of unchanged as investors digest the latest heavyweight corporate earnings, inflation data from UK and China and Q4 preliminary growth data from across Europe.
  • Peripheral markets are amongst the region's largest gainers. EcoFin's Juncker announced late yesterday that Eurozone's finance ministers have agreed to increase the lending capabilities of the EFSM to €500B starting in 2013.
  • Silvio Berlusconi’s Mediaset slides 1.6% as Milan judge says Italian PM must stand trial on charges of prostitution involving a minor and abuse of power.
  • The Spanish T-Bill auction was well received.
  • Swedish Central Bank raised its benchmark interest rate 25bps to 1.50% and also its projection for interest rates going forward.
  • German investor confidence rose to 15.7 in Feb. from 15.4 in Jan., missing est. of 20.
  • Q4 preliminary GDP - France +0.3% q/q vs con +0.6% Germany +4.0% y/y vs con +4.1%
  • UK Jan; RPI +5.1% y/y vs con +5.0%; CPI +4.0% y/y vs con +4.0%


  • Nikkei +0.20%; Hang Seng (0.96%); Shanghai Composite +0.0%
  • Asian markets were mixed in a tight range today, despite being helped by the fact that inflation in China came in lower than expected. China January CPI +4.9% y/y vs consensus +5.4%.  According to the NYT the Chinese changes the way the CPI is calculated this month…..  “The rise in prices was less than expected, but some economists said the data was difficult to judge because the statistics bureau recalculated the index to give less weight to food costs and more weight to housing costs. Those shifts and other changes designed to catch up with consumption patterns made it impossible to directly compare the January data to earlier months.”
  • Chinese banks fall on renewed concern country will raise rates
  • Hopes for profits were nearly outweighed by profit-taking as Japan rose slightly.
  • Thailand up +0.15, Bualang Securities jumped 9% on announcing it will pay both stock and cash dividends.
  • Australia finished flat. Brambles fell 1% and Westpac Bank edged down on results, taking other banks with it in sympathy.
  • South Korea fell (0.20%) slightly on foreign selling.
  • Indonesia was closed for The Prophet’s Birthday.
  • Japan December revised industrial output +3.3% m/m vs initial +3.1%. December capacity utilization index +3.0% m/m.
  • Japanese exporters climb as BoJ raises its economic assessment for first time in nine months.

Howard Penney

Managing Director






Yesterday, Reuters wrote a late day story on the SBUX/GMCR saga. The Reuters story completely goes against my theory. I’m sticking with my theory!


Reuters, citing a source close to the talks, said that “Starbucks Corp and Green Mountain Coffee Roasters are in partnership negotiations, a source close to the talks told Reuters on Monday, sending Green Mountain shares surging."  The really odd line in the story was this one: “The person close to the partnership talks would not say if the pending announcement would involve Green Mountain."  Are you kidding me?    


Have SBUX and GMCR talked?  I’m sure they have.  As the company has told me “they are exploring all their options.”  From where I sit, SBUX holds all the cards.  The single serve segment is important to SBUX but it's not really that important.  The U.S. coffee market is $34billion and the U.S. Grocery Coffee segment makes up $3.3 billion in sales.  The single serve segment represents $1.2B of the the U.S. Grocery sales.  It’s a big deal, but it means more to GMCR that it does to SBUX.


What is fascinating is that GMCR's market capitalization is 2x the entire U.S. Grocery coffee category and represent 50% of the entire US “specialty” coffee market.  Whether or not GMCR and SBUX make a deal (I'd be very, very surprised), the valuation of the company almost approaches that of its entire addressable market.  


Some additional thoughts:

  1. SBUX has the leverage not GMCR.
  2. SBUX has lots of partnerships.
  3. The current Kerug technology is not good enough for SBUX (why will version 2.0 work?).
  4. SBUX is not unhappy with the Tassimo technology.
  5. SBUX was unhappy with how Kraft handled the “brand” this includes the rollout of the single serve business.
  6. 80% of Starbucks customers don’t have a single brewer (Big opportunity for SBUX).


Maybe as SBUX and Kraft exit their agreement, a plan can be formulated involving the Tassimo technology?  After all, the Tassimo brewer is the preferred brewer of Hedgeye Risk Management!  The Tassimo technology was first introduced in France in 2004 and is now available in several countries in Western Europe as well as the U.S. and Canada.  The machines were developed by Kraft Foods, Inc.  New versions are now being manufactured by Bosch.


The battle for single serve coffee is brewing.  As I said before, the best analogy I can use to describe my prediction of what will happen in the single serve market is that Starbucks will do to the single serve coffee maker what Apple did to the portable market for mp3 players. 



Howard Penney

Managing Director

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