Notable news items from the past few days and price action from Friday’s trading.

  • SBUX price target was raised to $42 from $40 at Piper Jaffray
  • SBUX saw the U.S. Court of Appeals for the Second Circuit uphold a lower court’s ruling denying Kraft’s request for a preliminary injunction against Starbucks Coffee Company.
  • YUM’s Taco Bell is launching a $3 million television ad campaign this week to battle damage to its image from a lawsuit questioning its taco filling. 
  • JACK and SONC traded strongly on Friday on accelerating volume to close out a poor week.
  • CMG traded down 6.5% last week.
  • Aside from MRT, RRGB, KONA, and CHUX, last week was a poor week for casual dining. 
  • MRT traded up on Friday on strong volume as the company announced FY11 EPS guidance above Street estimates.



Howard Penney

Managing Director

CHART OF THE DAY: America's Currency is BROKEN



CHART OF THE DAY: America's Currency is BROKEN -  chart

Growth's Failure

This note was originally published at 8am on February 23, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The only real failure in life is not to be true to the best one knows.”



Yesterday was the biggest down day for US stocks since August 11th of last year. If and when the US stock market starts to really break down again, I think the only real failures in our industry will be revealed by those who have chosen not to evolve their global risk management process from 2008.


One down day certainly does not a bearish trend make. But a -2.1% drop in price momentum on an accelerating volume study of +31% (week-over-week) combined with a one-day rip of +27% in volatility (VIX) should definitely have the bulls’ attention.




That’s the core 3-factor model I use across risk management durations. That’s what I have stayed true to since I re-built the model in 2007. That’s just part of my process. In order to embrace uncertainty as a given, I think a risk manager is best equipped to be Duration Agnostic.


The only real failure in my process would be choosing not to change the process as this globally interconnected marketplace changes. One of the key changes that I’ve made in the last 3 years is changing the durations in my models, dynamically, as volatility levels change.


I model all security level volatility from the bottom up, but to simplify this point I’ll use the VIX. Here’s where a closing price of 21.11 in the Volatility Index (VIX) fits across my 3 core risk management durations (TRADE, TREND, and TAIL):

  1. TRADE (3-weeks or less) = bullish, with TRADE line support at 16.17
  2. TREND (3-months or more) = bullish, with TREND line support at 18.09
  3. TAIL (3-years or less) = bearish, with TAIL line resistance at  22.09

So, in Hedgeye-speak, what’s happened to the VOLATILITY factor in the SP500’s 3-factor model is critical to acknowledge. Whether the TRADE and TREND lines of bullish VIX support hold or not is something that Mr. Macro Market will decide but, for now, what was overhead resistance in VOLATILITY is now support – and that’s bearish for US stock market price momentum. A breakout in the VIX above the TAIL line will make things crash.


Now if you take this 3-factor model:

  1. PRICE down
  2. VOLUME up

And overlay it with a critical correlation – the inverse correlation between the SP500 and the VIX – you’ll see that this relationship has been one of the most important concurrent risk management indicators we’ve been offered since the early part of 2008. Ignore it at your own risk.


In the chart below, you can see that this isn’t foreign land for me to be treading on. When I made the bearish call for a US stock market correction in April of 2010 (our Hedgeye Macro Theme was “April Flowers, May Showers”) I gave you the same signals.


Well, almost the same…


Nothing in my models are ever really the same, particularly when I blow out the vantage point to that other sneaky little critter called The Rest of the World. That’s why my baseline Global Macro Risk Management Model includes 27-factors (which also change and re-weight dynamically) and include important real-time prices like the US Dollar, Indian stocks, Copper, etc…


And this is really where I can look myself in the mirror and say, despite the fierce lobbying for me to chase US stock market fund “flows” into their mid-February crescendo, I stayed true to the best top-down risk management process I know – when Global Inflation Is Accelerating, and Global Growth Is Slowing, it’s time to build up a large asset allocation to Cash.


Now not a lot of people have Street credibility on moving to Cash. Not only because they didn’t start making this move in early 2008, but because they don’t have an investment mandate that allows them to move into Cash. That’s an industry problem, not yours.


Global Growth Slowing is perpetuated by Global Inflation Accelerating. Anyone who has ever invested in emerging markets recognizes this basic reality. Everyone who is short Emerging Markets (EEM), India (IFN), and Brazil (EWZ), like we are in the Hedgeye Portfolio gets the profitability of it too.


The biggest question about Growth’s Failure in virtually all of Asia and the austere side of Europe that you can answer for yourself is will Global Growth Slowing affect the said “safe havens” of US and Japanese stocks?


My answer to this is not only implied by the high-frequency growth data that I grind through every macro morning, but it’s amplified by the math that stands behind the reality that Structural Long-Term Growth Is Impaired By Rising Sovereign Debts.


Whether it’s American, Japanese, or Western European debt, it’s all the same thing – debt. And that’s why we’re not surprised to see consumption growth slowing in these Developed Debtor countries as we infuse them with $95 oil and other inflation related taxes.


Growth’s Failure won’t be crystal clear to Wall Street until it’s in the rear-view mirror, but yesterday’s PRICE, VOLUME, and VOLATILITY readings combined with continued breakdowns in Asian Equities and a breakout in oil prices should read true “to the best one knows” about globally interconnected risks.


My immediate term support and resistance lines for the SP500 are now 1307 and 1330, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Growth's Failure - day1


Growth's Failure - day2

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“As the shark lunged for his head, Louie bared his teeth, widened his eyes, and rammed his palm into the tip of the shark’s nose.”

-Laura Hillenbrand, "Unbroken"


That’s a quote from an outstanding non-fiction novel that I’m reading by Laura Hillenbrand titled “Unbroken: A World War II Story of Survival, Resilience, and Redemption.” It’s a story of a selfless American Olympian by the name of Louis Zamperini who sacrificed more than this modern day man can begin to comprehend. They’ll turn this into a movie – and if they do it right, it may win an Oscar trophy someday too.


The story of American Sacrifice is one that we all know well. Alongside our Trashing Treasuries and Housing Headwinds Macro Themes for Q1 of 2011, it’s also something that we talk about during each and every one of our research team’s Morning Meetings here in New Haven.


Fundamentally, we do not believe that this country’s political leadership (Republican or Democrat) has it in itself to deliver on American Sacrifice. Since the introduction of the 112th Congress, handshakes and promises to the American people of cutting deficits and debts have already been broken. The credibility of America’s currency is broken too.


What remains Unbroken is the passion and faith that Americans who aren’t tied to a Washington compensation structure hold in their hearts and minds. From Wisconsin to New Jersey, that’s what you see rising to a boil. If it takes punching these political sharks in the proverbial nose, so be it…


We recognize what Washington and Wall Street’s Easy Money Elite want. They want us to keep doing what we’ve allowed them to do since Nixon abandoned the gold standard. He, not unlike Charles de Gaulle, moved to a deficit and devaluation strategy so that he could win the 1972 election.


Washington wants us to roll over and take it in The Inflation. They want to fear-monger us. They want to sell us. They want to lunge at us with the price volatility born out of the crises that they created.


Well, that might work for a select amount of the compromised, conflicted, and constrained few. But it doesn’t work for me and it doesn’t have to work for you or The Rest of the World either.


China’s Premier announced to the world last night that he’s willing to sacrifice short-term growth for price stability. In the 12th Five-Year Plan, China outlined an economic growth rate expectation of 7% annualized from 2011 to 2015. Sure, if they wanted to drop free moneys from the Eastern heavens and perpetuate The Inflation that would consume their citizenry, they could. But they aren’t. The Chinese don’t have to be re-elected.


After all that America has been through to fortify its individual rights and civil liberties, it’s both frightening and sad to see a State-managed economy like China’s manage The Inflation with more respect than we do. Tomorrow you’ll have our Almighty Central Planner outline to the world that he sees no inflation – or at least he sees none in his conflicted and compromised calculation.


Ahead of The Ber-nank’s semi-annual report on US Monetary Policy tomorrow, the US Dollar Index is hitting a fresh 4-month low. Sadly, this is more of the same in terms of intermediate and long-term trends. The US Dollar Index was down another -0.5% last week. It’s been down for 7 of the last 9 weeks. It’s a mess.


Surely, the US Government will blame last week’s inflation on a nut-bar in Libya. But don’t disrespect for one minute that for the last 3 years The Rest of The World has started blaming us too. Standing as the world’s fiduciary of the world’s reserve currency isn’t the next entitlement that our professional politicians can abuse – it may very well be the last.


On a week-over-week basis, this is The Inflation and Price Volatility that The Ber-nank will ignore:

  1. US Dollar Index = DOWN -0.5% (down 7 of 9 weeks)
  2. CRB Commodities Index = UP +2.9% (hitting fresh 2-year highs)
  3. Volatility (VIX) = UP +16.3% (up 22.5% in the last 2 weeks)

In the face of inflation and price volatility, growth signals continued to slow week-over-week:

  1. US Treasury Yields = DOWN across the curve last week
  2. Copper = DOWN -0.9% (despite Commodities being up)
  3. Yield Spread = DOWN 9 basis points to +270 bps (10s vs 2s)

But, have no fear, the US stock market remains Unbroken from an immediate-term TRADE perspective:

  1. SP500 TRADE line support = 1309
  2. NASDAQ TRADE line support = 2760
  3. Russell2000 TRADE line support = 803

So, Bernanke is doing his job, inflating the stock market -  and you have nothing to fear other than his fear-mongering itself. Right.


In the Hedgeye Asset Allocation Model, my teeth are barred with Cash and my eyes are wide open:

  1. Cash = 58% (up 3% week-over-week from 55%)
  2. International Currencies = 24% (Chinese Yuan and Canadian Dollar – CYB and FXC)
  3. Commodities = 6% (Oil and Grains – OIL and JJG)
  4. International Equities = 6% (Germany and Sweden – EWG and EWD)
  5. US Equities = 6% (Healthcare – XLV)
  6. Fixed Income = 0%

My immediate term TRADE lines of support and resistance for the SP500 are now 1309 and 1325, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Unbroken - bb1


Unbroken - bb2


The Macau Metro Monitor, February 28, 2011



Visitor arrivals to Singapore rose 16.2% YoY to 1,055,000 in January, the highest total ever for January.  Visitors from Indonesia (208,000), China (132,000), Australia (98,000), Malaysia (78,000), and India (63,000), accounted for 55% of foreign visitors.  Overall RevPAR rose 19.8% YoY to S$183.



For the week ending February 25, 2011.


This week we’re rolling out for the first time our version of a summary product designed to help keep you up to speed with our latest research and our current thoughts on both topical and non-consensus issues.


Given that this is our first take, we’d love to hear your thoughts on if this is something you find valuable and how we can improve it to better suit your needs. If there’s anything you’d like us to add/omit, let us know. Please reply with any feedback at your earliest convenience.


The format is as follows: 1) Commentary from team members; 2) Highlights from this week’s Q&A on the Morning Macro Call; 3) Asset Allocation update; and 4) Quick summaries of select Macro research notes and updates to select Quarterly Macro Themes.




Keith McCullough – Strategy

CALLOUT OF THE WEEK: On the margin, the biggest risk factor in my macro model that fortified itself this week is that growth is slowing sequentially in the United States. For the last 3 months, the high-frequency data on Global Growth Slowing (Asia in particular) has been more pronounced than US Growth Slowing. Inflation is both a policy and a consumption tax in America and the consumer stocks are starting to reflect this reality.

OUT OF CONSENSUS WATCH:  With all eyes focused on the impact of Global Inflation Accelerating, we now have a consensus that understands the immediate-term impact of rising oil prices. What I don’t think is a consensus focus anymore is the heightening probability of the second wave of the US Housing crisis. Mortgage applications remain abysmally low and New Home Sales data for January remained very weak.


Daryl Jones – Geopolitics; Commodities

CALLOUT OF THE WEEK: Soft commodities are beginning to trade on supply and demand fundamentals in the short term.  Two examples are corn, which is up +4.65% in the last month, and oats, which is down (-6.9%) in the last month.  Despite common top down drivers like USD weakness and global consumption patterns, shorter term supply fundamentals are dominating and leading to price divergence.

OUT OF CONSENSUS WATCH:  With much national media attention focused on State level budget battles, March 4th looms large in Washington.  This is the date that Congress decides whether to extend the current budget, until a new budget can be agreed on.  Current political rhetoric suggests a deal is not close, so a shutdown of the Federal government is realistically imminent.


Matt Hedrick – Europe

CALLOUT OF THE WEEK: With the PIIGS still some of the top equity market performers YTD, we caution on the mean reversion trade. Credit yields continue to signal the risk premium to own sizable sovereign debt leverage. The EUR made recent gains vs. major currencies alongside a more hawkish tone from policy makers over the last weeks; we continue to like countries and currencies with active independent central banks (SEK, CHF, and GBP) as the USD continues to get debauched by Bernanke and Co. 

OUT OF CONSENSUS WATCH: Italy could be one southern European country in particular to see a mass exodus of refugees to its shores given the uprisings in Northern Africa. Officials in Brussels believe as many as 750K could attempt to cross the Mediterranean, but Libyan estimates put the figure as high as 2 Million (of a population of ~6.4 Million Libyans).  Italy already faced an influx of over 5K Tunisian refugees following the country’s regime change.  Clearly, policing an influx of these proportions would be a huge tax on the Italian state. 


Darius Dale – Asia; Latin America; State & Local Governments

CALLOUT OF THE WEEK: After today’s dead-cat bounce, most of Asia’s equity markets remain broken on a TRADE and TREND perspective. We caution against buying the dips and growth storytelling at these prices. If we wanted long exposure to Asia, we would prefer to do so through the currency market (IDR, SGD, and HKD).

OUT OF CONSENSUS WATCH:  The last thing cash-strapped State & local governments need at this stage of the budget cycle is deceleration in US growth (lower tax receipts) due to higher inflation. Dollar debasement perpetuates both sides of the economic cycle…




Every morning at 8:30AM EST, we host a live conference call with clients whereby Keith’s 15 mins of prepared global macro commentary is followed by 5 mins of live Q&A (if you need a dial-in code, please email us a ; the call is also podcasted on our website each morning by 9:00AM). Below is a sample of some of the better questions we received this week (answers paraphrased).



Q: Your 1340 resistance level for the S&P 500 looks like it was dead on. How much downside should we expect from here based on how overextended the market was/is in your model?

A: We need to test 1307 in the next 48 hours, which would be a 3% correction. From an intermediate term TREND basis, support is way down at 1251, which, from its peak, would be a 7-7.5% drawdown.



Q: What’s the house view on Middle East and oil at these levels?

A: Both conflict in the Middle East and current crude oil prices are sustainable. From an immediate-term TRADE perspective, however, oil is overbought. We’d be buyers of WTI around TRADE support at $89.50.



Q: Walk us through in detail how Feb 2011 rhymes with Feb 2008 – particularly from a sentiment and expectations perspective. Walk us through all the bearish macro fundamentals that would keep you from buying US equities should the market appear it wants to test its TREND line of support.

A: “Flows”, ample liquidly, and “you can’t be in cash b/c of inflation” were all offered as reasons to buy equities [at the top]; consumer confidence was peaking [it wound up being a contrarian indicator in ‘08]; and inflation choking off a great run in private consumption growth all rhyme when comparing early ’08 to early ’11. Accelerating inflation (Trashing Treasuries), slowing consumption growth (Consumption Cannonball), and deflating housing prices (Housing Headwinds) are all reasons we are negative on equities for the intermediate-term TREND. We will not buy and hold dips b/c we believe valuation is NOT a catalyst in a market where the Global Macro backdrop suggests growth is slowing and inflation is accelerating.



  • Cash: 58% vs. 58% 1wk ago vs. 64% 1mo ago
  • US Equities: 6% vs. 6% 1wk ago vs. 6% 1mo ago
  • Int’l Equities: 6% vs. 6% 1wk ago vs. 0% 1mo ago
  • Commodities: 6% vs. 6% 1wk ago vs. 6% 1mo ago
  • Int’l FX: 24% vs. 24% 1wk ago vs. 18% 1mo ago
  • Fixed Income: 0% vs. 0% 1wk ago vs. 6% 1mo ago 



To access the full reports, please copy/paste the associated links into the URL of your browser.


Housing Headwinds Part II:

2/22: Joshua Steiner: Home Price Declines Gaining Steam: All Markets Weakening Except For DC: 

  • Case-Shiller 20-city home prices this morning fell -1.0% MoM and -2.4% YoY on a non-seasonally adjusted basis. We expect home prices will continue to fall at an accelerating year-over-year rate through July 2011, and will continue to fall in absolute terms thereafter.
  • Eleven of the 20 markets are now at new lows on an NSA basis, up from nine last month.  19 of the 20 markets fell MoM (Washington D.C. was the exception with a 0.3% MoM gain) and 18 of the 20 markets were lower YoY.
  • The Corelogic Home Price Index fell -1.8% MoM and -5.5% YoY.  This was an acceleration on both metrics.  At the current pace of MoM change (even without continued acceleration), the Corelogic HPI will hit a new low next month. 

Consumption Cannonball:

2/22: Brian McGgough: Retail: 3 Stages of Grief: 

  • One thing we find consistently surprising are managements’ comments about how “if all else fails, the consumer will absorb the cost of inflation.” In retail, that is almost never the case.
  • Based on what the retailers, brands, and manufacturers are saying, the consumer will need to grow the size of their wallet by 3-5% on like-for-like product this year, and fork it all over to maintain peaky profit margins on so/so businesses.
  • What do Wal-Mart, VFC Corp and to a degree Macy’s all have in common? They’re forecasting healthy consumer spending in 2011 without meaningful margin erosion. How in the world can they do this with 87% of the year left to go and we’re two months away from the point where the highest raw material headwind the modern retail industry will hit margins? 

2/23: The Gadhafi--Berlusconi Trade: 

  • We view Italy’s outsized energy exposure (via ENI) to Libya as a critical force weighting to the downside of its equity market, or the etf EWI with its heft ENI weighting
  • We’ve long been critical of the Italy’s excessive debt leverage and have been short Italy via the etf EWI at times over the last 6 months in the Hedgeye Virtual Portfolio. Now, we see even more short-term downside pressure for Italy’s FTSE MIB given the country’s exposure to the precarious state of Libya.
  • The FTSE MIB is trading between a rock and a hard place. It is trading above its TREND line of support at 21,193, but recently broke through what was its TRADE line of support, and is now resistance, at 22,709.

Japan’s Jugular: 

2/23: Japan’s Jugular Update: Just Getting Started on the Short Side of Japanese Equities:

  • Though we covered our oversold short position in Japanese equities today in the Hedgeye Virtual Portfolio, we remain outwardly bearish on Japan’s intermediate-term TREND and long-term TAIL.
  • This morning we covered our short position in the EWJ for a gain. We’ll look to re-short Japanese equities on a bounce back up to its immediate-term TRADE line of resistance at 10,909.
  • Watching how US equities trade will be critical here, as both markets have been the beneficiaries of the “flows” into relative “safe havens”. If 1,307 in the S&P 500 doesn’t hold or if it can’t close above 1,330 in the immediate term, the probability of a meaningful bounce in Japanese equities dwindles. 

2/24: Early Look: Mr. Money Man:


For the week-to-date, here’s your US Dollar/Commodity Inflation score: 

  • US Dollar Index DOWN -0.33% for the week-to-date (down for 7 out of the last 9 weeks)…CRB Commodities Index UP +1.7% to 347 (making a series of fresh weekly closing highs all the while).
  • LONGS - Dollar denominated food and energy inflation, currencies of countries with hawkish central banks, financials in socialized countries that have made banks too big to fail.
  • SHORTS - Sovereign Bonds of countries with deficit and currency devaluation central planners, currencies of countries with dovish central banks, emerging markets.

2/24: Pavlov’s Bell: SP500 Levels, Refreshed:

  • Right now, the SP500 is trying to make up its mind between a  -2.6% correction (1308) and a -6.9% drawdown (1251). If the SP500 closes below 1308, we’ll say a -6.9% intermediate-term peak-to-drawdown is a probable risk.
  • If the SP500 can close above 1308, a lower-high of immediate-term TRADE resistance at 1330 is still our line.
  • Pavlov may very well have taught everyone to buy every dip – but that doesn’t mean everyone is still going to be a winner. 

2/25: Could The Turmoil in the Middle East Be Bearish for Oil?: 

  • We are long OIL in the Virtual Portfolio as price continues to confirm this position, but longer term, as history shows us, political liberalization could actually support growing production.
  • A lot would have to happen for Western Oil companies to up investment in less stable regions like Iran and Libya, but both Iraq and Russia do provide some credence to the idea that production, over the longer term, could grow if the ultimately outcome is the spread of democracy and rule of law.
  • While the price of oil is still more than $40 from its all time high, it is very close to highest February close of $101.78 in February 2008.  This abnormal and non-seasonal price movement emphasizes the powerful price move we are seeing. 

Enjoy the rest of your weekend,


The Hedgeye Macro Team

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%