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

  • SBUX will begin selling instant coffee in China next month.   The stock gained 1.4% yesterday, outperforming QSR peers, on accelerating volume. 
  • SONC was upgraded to Neutral from Negative at Susquehanna.  Yesterday the company announced its estimate that second fiscal quarter same-store sales increased 1.0%-1.5% for the quarter, continuing the improving sales trend from the first quarter.
  • EAT gained 4.3% on strong volume following yesterday morning’s upgrade from UBS on stabilizing Chili’s trends.
  • DIN declined 5% on accelerating volume.  DIN spoke at the RJ conference yesterday.
  • CMG was downgraded to Underperform from Hold at Jeffries.  Rising food cost inflation was cited as the reason behind the change and the price target provided was $198.
  • CBRL gained 50 basis points on accelerating volume but will likely underperform if oil trends higher. 
  • MCD U.S. comps came in at +2.7% versus the estimate of +4.0%.  I will have a more detailed post on this later this morning.
  • TAST trading up on accelerating volume - Burger King gaining some traction?
  • An interesting story on highlights growing scrutiny restaurant companies are being placed under about the legal status of their workers.  Pei Wei Asian Diner is the latest target of investigation in this regard following the (ongoing) investigation of CMG that came to light recently.



Howard Penney

Managing Director


“Tis one thing to be tempted, another thing to fail.”

-William Shakespeare


I sold my long positions in oil (OIL) and Brazilian oil giant Petrobras (PBR) on yesterday morning’s opening market strength. This doesn’t mean I am not bullish on either (in the Hedgeye Portfolio we are still long China National Offshore –CEO, and Suncor -SU). This simply means that my risk management model was calling them both out as immediate-term overbought.


Overbought is as overbought does. Sometimes my risk management signals are wrong. Most of the time they aren’t. Temptation is always there to violate my investment process. Most of my big mistakes are a direct function of giving in.


What if I gave into consensus on February the 18th and bought the SP500 at 1343? What if I gave into the Temptation of The Flows into US and Japanese Equities that peaked in the same week? What if I saw the hedge fund community’s highest net long position in bullish oil contracts yesterday (highest since 2006) and decided to ignore my risk management signal on the oil price?


“What if” may be an acceptable strategy for someone living in the theoretical. In this globally interconnected game of decision making however, there are no “what ifs.” There are players and pretenders. There are wins and losses.


Subliminally, I may have learned this risk management process from my Dad. Whether it was in his profession as a firefighter or in the game of life that he coached me – somewhere along the line I learned that we are all accountable for the decisions we make in this life and how those decisions affect others.


While I highly doubt that the US Federal Reserve is going to be sourcing risk management lessons from a few Canadian Bears on the topic of accountability, maybe they’ll re-read this quote about Temptation from their Maestro of ideological groupthink gone bad:


“The temptation is to step on the monetary accelerator or at least to avoid the monetary brake until after the next election… giving into such temptations is likely to impart an inflationary bias to the economy and could lead to instability, recession, and economic stagnation.”

-Alan Greenspan, 1993


Again, like any good Fire Chief or Global Macro Risk Manager, you should re-read that quote slowly. And read it again. While there is a Temptation to scan for headlines about some Libyan nut-job as opposed to understanding the long-term structural underpinnings of the The Inflation, it always pays to take the time to make the highest probability decisions based on the best information you have.


That Greenspan quote was highlighted by the late Austrian economist who I have cited recently - Murray Rothbard. Later on in his book, “The Case Against The Fed”, this is what Rothbard had to say in order to contextualize The Inflation that the Fed perpetuates:


“We are now so conditioned by permanent price inflation that the idea of prices falling every year is difficult to grasp. And yet, prices generally fell every year from the beginning of the Industrial Revolution in the latter part of the 18th century until 1940, with the exception of periods of major war.” (page 21)


Interestingly, Rothbard published this book in 1994 and passed away in 1995. Since, the American financial system has learned virtually nothing from these types of risk management perspectives. That’s because the modern day US Empire of Fiat Finance is grounded in a policy to inflate the stock market (see the inflation chart below dating back to the year 1500).


Can our industry or America’s conflicted and compromised politicians handle a deflation of inflated prices? Can they handle a reflation of the price of a Debauched Dollar? I think the answer to those questions is as clear as Americans living on entitlement goodies - many have a patriotic answer about debts and deficits, but they lack a pragmatic plan; particularly if the plan hits them in the wallet.


To be crystal clear on this, if I was damned into the job of Chief Central Planner in this country, this is what I would do:

  1. Raise interest rates
  2. Cut entitlement spending
  3. Strengthen the US Dollar

Points 1 and 2 address both monetary and fiscal policy head on. Point 3 would be the effect. Going back to the following experiences:

  1. 1950’s-1960’s France and Britain
  2. 1970’s United States of America
  3. 1990’s Japan

There hasn’t been a modern economy that has devalued its way to prosperity by debt financed deficit spending.


The Temptation is to create massive US Dollar denominated correlation-risk (USD inverse correlation to the price of oil is currently -0.93) that all interested inflation policy parties can blame on the Middle East or “global supply and demand imbalances” if unwound.


But be careful on that Temptation because it creates expectations. We Expect Price Volatility, not Price Stability. That’s why small business owners like me won’t jump in with both feet and start hiring aggressively. Anyone who has to meet a payroll in this country gets it – our medical and employment costs are rising as economic growth slows. As Greenspan reminded the Keynesians in 1994, that’s what The Inflation does.


Thankfully, one voting member of the Federal Reserve had the political spine to call this like it is yesterday. Dallas Fed President Richard Fisher told the Institute of International Bankers in Washington, DC that “the liquidity tanks are full, if not brimming over.”


Indeed Mr. Fisher. Indeed. That’s what printing money with an inflation policy achieves. It’s time to get out of the way, let the US Dollar strengthen, and the price of oil deflate.


My immediate term support and resistance levels for WTI Crude Oil are $101 and 107, respectively. My immediate term support and resistance levels for the SP500 are now 1297 and 1315, respectively.  


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Temptation - c1


Temptation - c2

CHART OF THE DAY: Inflation is a Fiat Policy



CHART OF THE DAY: Inflation is a Fiat Policy -  chart

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GS downgraded WMS and trashed the sector.  Their slot estimates are factually wrong but are their concerns warranted?



Goldman Sachs sent shock waves through the gaming investment community yesterday with the release of its annual slot survey.  Smaller than expected slot budgets, waning Wide-Area Progressive (WAP) demand, and more competition were cited as reasons to be cautious on the stocks.  The firm was particularly negative on WMS and actually downgraded the stock to sell.


While we are not sure WMS is a sell given the favorable long-term outlook for this sector, we’ve articulated the view that the company is in danger of losing some share in calendar 2011.  GS’s survey corroborates that to some extent.  However, we must take the slot company responses with some caution.  Firstly, the number of participants and the participating operators in the survey change each year, so the results each year aren't exactly apple to apple comparison of sentiment changes within the same group.  In last year’s survey, WMS was cited as the clear winner in the survey, yet from Q4 2009 to Q4 2010, its market share was essentially unchanged.  IGT was considered somewhat of a loser in last year’s survey, yet its market share only dropped 1%.  In terms of stock performance, WMS has dropped 24% since last year’s GS survey was released up until the day before this year’s survey while BYI and IGT only fell 7% and 5%, respectively.


The reaction yesterday may have been extreme but we’re still a little wary of WMS over the near term.  We do like IGT and BYI – IGT is a better near-term story because it’s safer (margin levers) but BYI is a better 12-18 month story.  Both should be sequential market share gainers as we move through the year.


In terms of Goldman’s industry conclusions, we would caution investors on putting too much stock on operator responses regarding budgets.  We stand by our 55k estimate for calendar 2011 replacement demand versus GS at 47k.  More importantly, we are pretty sure GS’s slot estimates for new casinos and expansions are just flat out wrong.  They appear to be off by 10k units in 2011 and 20k units in 2012.  Here are the discrepancies:




The other important issue is wide area progressive where GS seems to be overly focused.  Yes that business is waning but they ignore that a big reason for that is the growth in other pricing models such as fixed daily fees and straight revenue participation.  These are actually higher margin pricing schemes because there is no jackpot expense. 


We continue to believe that replacement demand is uncertain but priced in to the stocks.  IGT seems to be the best positioned over the near term because they maintain the most margin levers should replacement growth fail to materialize.  BYI seems to have the most upside over a 12-18 month time horizon given the likely technology-driven, sequential pickup in ship share off of a low base and low valuation.  WMS is well-positioned long term but could continue to hit bumps in the road as market share normalizes at a lower level.

Virtue's Lie

This note was originally published at 8am on March 03, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“So our virtues Lie in the interpretation of the time.”

-William Shakespeare


This morning Global Equity markets are begging for Libyan resolve. The Chinese and Russians talking down a US no-fly zone notwithstanding, fidgety bulls are trading on a tick with the direction of the price of oil. That is “the interpretation of the time.” That price volatility is also becoming this market’s greatest risk.


The longer term risk management question as to the pace of Global Inflation Accelerating remains – if peace and love were to breakout across the Middle East tomorrow, will that stop the world’s reserve currency from being debauched?


Looking at the Global Currency market’s real-time vote on money printing, Ben Bernanke’s 2-day Semi-Annual Storytelling on US Monetary Policy was a disaster. Whether The Ber-nank chooses to be willfully blind to this or not, the US Dollar Index is now down for 8 of the last 10 weeks and collapsing to lower-lows.


Proving that petrodollars are indeed affected by the dollar’s price or that US Dollar priced inflation at the pump is a consumption tax on US growth is a trivial exercise. What isn’t trivial to the American public is the math. And that’s not because the math isn’t trivial. It’s because we have allowed an Almighty Central Planner to garner so much political power that he can not only obfuscate things like math – but make up his own interpretations of the times.


Before I get into Bernanke’s definition of what the US Dollar is (Ron Paul asked him for it yesterday), here’s the math on the inverse correlations between US Dollars and things that are inflating:

  1. Oil = -0.86
  2. Gold = -0.90
  3. CRB Commodities Index = -0.90

*Note to Fed: this correlation risk is running extremely high


And if you want the R-squares on these relationships they run between 0.74-0.82, so the correlation between what the US Dollar is doing and inflation is doing is crystal clear. Now some academic brainiac who is defending the Keynesian Kingdom of thought is going to quickly say something in response about “causality versus correlation” and, while there may be differences in certain scientific exercises, it’s a crock when it comes to analyzing the Fed’s mandate.


The Fed’s official marketing mandate is “price stability.” Whereas the Bernanke Fed’s operative has been to print money and inflate. He has only raised interest rates ONCE (2006) and he has overseen the highest levels of PRICE VOLATILITY that modern day markets have ever seen. Ever is a long time.


What is causality? What are the root causes of inflation? Is the global market place or The Bernank going to resolve this debate? Mr. Macro Market all but evaporated the Keynesians with The Inflation of the 1970s – are we looking to roll the bones to see if we get one of those again? (see the chart below of long-term median price inflation going back to the year 1500 from Reinhart & Rogoff’s This Time Is Different, page 181)


First, to attempt to briefly address some answers to these questions, let’s define what the US Dollar and Causality are:

  1. Causality (per Wikipedia) – is the relationship between an event (the cause) and a second event (the effect), where the second event is understood as a consequence of the first (agreed).
  2. The US Dollar (per Bernanke yesterday) – is the buying power of a piece of paper for things that people actually need to buy (agreed).

Now, since Bernanke says there is no inflation, he says the “price stability” and buying power of the US Dollar are just fine. And every American who doesn’t have a car service take them to work will tell you that’s the most ridiculous conclusion they’ve ever heard. In fact, most Americans think Bernanke is simply part of the government lying to them about real-world inflation – and you know what, most Americans aren’t as stupid as Bernanke must think they are – they are right.


Back to causality - to understand the cause of inflation, one must study the history by which The Inflation is priced – fiat currencies:



  1. 1913 – US Federal Reserve Act allows the US to move towards a money printing model that would eventually abandon the Gold Standard
  2. 1917 – US Treasury is given discretion to issue US Treasury Debt (to finance War, not national deficits and political careers)
  3. 1919 – Post WWI, 60% of Global Reserves are denominated in US Dollars


  1. 1950’s – France ran deficit and devaluation policies (debauching the franc and France’s currency credibility)
  2. 1960’s – Britain ran deficit and devaluation policies (debauching the pound and Britain’s currency credibility)
  3. 1970’s – USA ran deficit and devaluation policies (debauching the dollar and America’s currency credibility)

Do we need to bring back a great American leader (Herb Brooks) to line The Bernank up on the blue line and repeat – “Again”… “Again”… “Again”? Or do we need a Miracle? Developed economies (including our own) have tried this over… and over… and over again with the cause (politics) and effect (inflation) being the same.


To make matters worse, it appears that the Big Government Spenders of longstanding European and modern American ilk haven’t learned a damn thing from all this. Bernanke seems readily prepared to blame any unintended consequences associated with this US Dollar Crisis on either Congress or someone in the Middle East. Gotta love the accountability in that. ‘Congress needs to stop spending, but I need to keep printing’ – he said it, not me.


My bearish view of Bernanke’s process isn’t a new one. Neither is managing the systemic risk that the Federal Reserve imposes on global market prices. Anyone who has been managing market risk for the last decade has been paid to accept and understand that the Greenspan/Bernanke interpretations of the times have not worked. As the late Murray Rothbard (distinguished Austrian School of economics professor) wrote in “The Case Against The Fed” in 1994:


“The Federal Reserve System is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of, or can truly supervise, its operations… and this strange situation, if acknowledged at all, is invariably trumpeted as virtue.”


Maybe it has become the virtue of the few who hold centralized power in the palm of their hands – but this is not the virtue of the American Constitution. Neither is it the virtue of this Canadian who thought he was building an American family and firm under a President’s marketing pitch about Transparency, Accountability, and Trust. This virtue is a lie.


My immediate term support and resistance lines for the SP500 are now 1291 and 1319, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Virtue's Lie - f1


Virtue's Lie - f2


TODAY’S S&P 500 SET-UP - March 8, 2011

As we look at today’s set up for the S&P 500, the range is 19 points or -1.00% downside to 1297 and 0.45% upside to 1316.  The futures are trading higher as Oil falls for the first day in three.  Most Asian stocks climb on speculation Chinese regulators will stop measures to cool lending and European markets are mixed as German factory orders rise more than expected in January.



  • 7:30 a.m.: NFIB Small Business (Feb.) est. 95, prev. 94.1
  • 7:45 a.m.: ICSC Weekly retail
  • 10 a.m.: Fed nominee Diamond testifies at Senate panel
  • 11:30 a.m.: U.S. to sell $23b in 52-wk bills, $40b in 4-wk bills; 1 p.m.: $32b in 3-yr notes
  • 12 noon: DoE energy outlook
  • 4:30 p.m.: API energy   


  • U.S. Treasury Secretary Geithner to visit Frankfurt, Berlin, Germany, on March 8 to discuss global economic outlook, financial reform, “global efforts to impose sanctions applying maximum pressure” on the regime of Libya’s Qaddafi, sanctions against Iran for “its failure to meet its international obligations”
  • Outside advisers to the FDA meet to discuss findings of report on Novartis’s Arcapta Neohaler in people with chronic obstructive pulmonary disease
  • Israel may seek an additional $20b billion in U.S. security aid to deal with potential threats stemming from Middle East turmoil, the Wall Street Journal says, citing an interview with Defense Minister Ehud Barak



For the second day we have 5 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND. 

  • One day: Dow (0.66%), S&P (0.83%), Nasdaq (1.40%), Russell (1.54%)
  • Month-to-date: Dow (1.11%), S&P (1.29%), Nasdaq (1.32%), Russell (1.36%)
  • Quarter/Year-to-date: Dow +4.43%, S&P +4.17%, Nasdaq +3.5%, Russell +3.65%
  • Sector Performance: - Materials (1.72%), Tech (1.27%), Consumer Discretionary (0.99%), Healthcare (0.77%), Industrials (0.93%), Energy (0.70%), Financials (0.67%), Consumer Staples (0.27%) and Utilities +0.39%


  • ADVANCE/DECLINE LINE: -1614 (-696)  
  • VOLUME: NYSE 1035.64 (-0.28%)
  • VIX:  20.66 +8.39% YTD PERFORMANCE: +16.39%
  • SPX PUT/CALL RATIO: 2.28 from 1.98 (+15.65%)


Treasuries finished weaker following some intraday strength

  • TED SPREAD: 20.81 -0.102 (-0.486%)
  • 3-MONTH T-BILL YIELD: 0.11% -0.01%
  • 10-Year: 3.51 from 3.49
  • YIELD CURVE: 2.81 from 2.81


  • CRB: 362.88 flat YTD: +9.04%  
  • Oil: 105.44 +0.98%; YTD: +13.26% (trading -0.09% in the AM)
  • COPPER: 432.70 -3.53%; YTD: -3.76% (trading -1.20% in the AM)  
  • GOLD: 1,432.03 +0.27%; YTD: +1.12% (trading +0.18% in the AM)  


  • Copper Falls to Two-Week Low as Higher Oil Prices May Curb Economic Growth
  • Wheat Drops for a Second Day on Steady Winter-Crop Conditions in the U.S.
  • Silver, Close to 31-Year Peak, Displays Bearish Signal: Technical Analysis
  • Cotton Futures Plunge by Daily Limit After Rally to Record Seen Overdone
  • Gold Erases Decline in London Trading, Advances 0.2% to $1,434.98 an Ounce
  • Ivory Coast Conflict Escalates as Gbagbo Seizes Control of Cocoa Exports
  • Japan to Revise Mine Law to Access Subsea Resources of Up to $3.6 Trillion
  • India Aims to Double Milk Output Growth, Become `Major Player' in Dairy
  • Palm Oil `Volatile' as Biofuel Role Increases Mideast Impact, Bursa Says
  • Malaysia Taps Persian Gulf to Boost Commodities Trading: Islamic Finance
  • Lynas's Chief Turns Contrarian $5 Million Rare Earth Bet Into $3.5 Billion


  • EURO: 1.3965 +0.16% (trading -0.27% in the AM)
  • DOLLAR: 76.496 +0.13% (trading +0.25% in the AM) 


  • FTSE 100: (0.10%); DAX (0.15%); CAC 40 +0.25%
  • European indices are trading mixed helped by easing crude prices on reports the OPEC may raise production.
  • German factory orders rose 2.9% M/m in Jan. vs est. 2.5%.
  • Telcos are among the biggest gainers as Morgan Stanley raises European Telecom Services sector to attractive.
  • Greek is the worst performing market - banks continue to slide after Moody’s yesterday cut its credit rating three notches to B1.


  • Nikkei +0.19%; Hang Seng +1.71%, Shanghai Composite +0.12%
  • Mast Asian markets traded higher this morning.
  • Construction stocks led South Korea higher, though tech stocks fell.
  • Japan rose slightly on short-covering and acquisition activity. Tech shares followed their US peers down, but bargain-hunting more than made up for the declines.
  • Rumors floated around Europe that China might raise reserve requirements post-close, but citing sources, Reuters actually reported that the country reversed requirements that had been imposed on some banks after they curtailed their lending

Howard Penney

Managing Director



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