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

  • COSI reported strong sales trends for 4Q10 and continues performance into the current quarter.
  • SBUX, BJRI, DPZ, THI and JACK are speaking at the JP Morgan conference.
  • PNRA was downgraded to neutral from buy at SunTrust Robinson Humphrey
  • BKC co-chairman of the board, John W. Chidsey, will resign next month.
  • WEN plans to offer a super-foods-based salad this summer containing blueberries, strawberries, almonds and a dressing made with açaí juice.
  • KFC have unveiled a bun-less burger known as the double in New Zealand.  According to The Age, it has double the chicken, double the bacon, double the cheese, and doubles your risk of a coronary.
  • DRI recovered nicely yesterday after trading poorly in light of earnings last Thursday after the close and Friday’s cautious commentary from management during the earnings call on Friday.



Howard Penney

Managing Director


TODAY’S S&P 500 SET-UP - March 29, 2011


We are looking at the short end of the yield curve to tell us where the political wind is blowing – that’s where the politicization is – and we’re seeing a huge move higher in 2yr yields here, implying no Quantitative Guessing III (QG3).


As we look at today’s set up for the S&P 500, the range is 31 points or -1.39% downside to 1292 and 0.98% upside to 1323.




As of the close yesterday we have 5 of 9 sectors positive on TRADE and 8 of 9 sectors positive on TREND.  The XLU is the only sector to be broken on both TRADE and TREND. 

  • One day: Dow (0.19%), S&P (0.27%), Nasdaq (0.45%), Russell (0.25%)
  • Month-to-date: Dow (0.23%), S&P (1.28%), Nasdaq (1.85%), Russell (0.2%)
  • Quarter/Year-to-date: Dow +5.36%, S&P +4.18%, Nasdaq +2.93%, Russell +4.86%
  • Sector Performance: Healthcare (0.03%), Consumer Staples (0.03%), Industrials (0.09%), Energy (0.24%), Financials (0.33%), Utilities (0.35%), Materials (0.46%), Tech (0.23%), and Consumer Discretionary (1.04%)




  • ADVANCE/DECLINE LINE: -587 (-1526)  
  • VOLUME: NYSE 784.29 (-4.91%)
  • VIX:  19.44 +8.54% YTD PERFORMANCE: +9.52%
  • SPX PUT/CALL RATIO: 1.82 from 1.99 (-8.92%)



Treasuries were weaker for an 8th consecutive session.

  • TED SPREAD: 21.07 -1.724 (-7.567%)
  • 3-MONTH T-BILL YIELD: 0.11% +0.02%
  • 10-Year: 3.47 from 3.46
  • YIELD CURVE: 2.66 from 2.67


  • 9 a.m.: S&P/CaseShiller Home Price, est. M/m (-0.44%), prior (-0.41%)
  • 10 a.m.: Consumer Confidence, est. 65.0, prior 70.4
  • 11:30 a.m.: U.S. to sell $40b in 4-week bills, $35b in 5-yr notes
  • 4:30 p.m.: API inventories  


  • Wal-Mart gender bias case arguments heard by the Supreme Court
  • News Corp. said to be in talks to hand over control of Myspace to Vevo.com
  • U.K. government hosts meeting of foreign ministers in London to resolve differences among coalition partners on Libya
  • U.S. district court hearing for GM vs Allied Systems. If Allied systems doesn’t attend may be ordered to release the 1,704 vehicles being held at its facilities




THE HEDGEYE DAILY OUTLOOK - daily commodity view



  • Rising Corn Acreage Seen Failing to Meet Increased U.S. Feed, Ethanol Use
  • Crude Oil Trades Near One-Week Low in New York as Libyan Rebels Make Gains
  • Copper Declines for Fourth Day on Concern About Weakening Chinese Demand
  • Gold Drops for Fourth Day on Signs U.S. Economic Recovery Is Strengthening
  • Corn, Wheat Climb on Speculation Japan May Sustain Imports Following Quake
  • Commodity Gains May Exceed Forecast on Japan, Middle East, Goldman Says
  • Japanese Rice Imports Are Unlikely to Rise After Quake, U.S. Group Says
  • Sugar Gains on Speculation About Curbed Supplies From Brazil; Cocoa Falls
  • Corn, Wheat Demand in Japan ‘Resilient’ After Quake, FCStone’s Clancy Says
  • Cosco Singapore Says Japan Not Major Destination for Its Dry-Bulk Carriers
  • N.Z. Vegetable Exports May Increase on Japan Radiation Concern, Groups Say
  • Delta Spars With Morgan Stanley on Proposal to Curb Commodity Speculation
  • Copper Will Lead Base-Metals Rally on Shortage, Brook Hunt's Kettle Says
  • Rio Tinto Is Said to Discuss Acquiring Riversdale Shares From Brazil's CSNws




THE HEDGEYE DAILY OUTLOOK - daily currency view





  • Germany Apr GfK index 5.9 vs consensus 5.8
  • France Feb Consumer Spending +0.9% m/m vs consensus +0.4%
  • UK Q4 Final GDP +1.5% y/y vs preliminary +1.5%
  • UK Feb mortgage approvals 46.97k vs consensus 46.0k
  • European Automobile Manufacturers' Association (ACEA) Feb Commercial Vehicles Registrations in the EU +16.8% y/y






Most Asian market traded lower; China was the worst performing market in the region. 


MACRO: Japan February retail sales +0.1% y/y vs consensus (0.5%). Jobless rate 4.6% vs consensus 4.9%. Household spending (0.2%) m/m, matching expectations.














Howard Penney

Managing Director

CHART OF THE DAY: Inflation in the U.S. is Up and to the Right



CHART OF THE DAY: Inflation in the U.S. is Up and to the Right -  chart

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Instinctive Effort

This note was originally published at 8am on March 24, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It is no other than the instinctive effort of every people towards liberty.”



It’s both sad and exciting to watch Portuguese politicians fall on their swords of Keynesian storytelling this morning. And oh the irony of Portugal’s PM bearing the name of the great Greek philosopher. Socrates’ decision certainly adds to the philosophical field of ethics. For the first time, he’s actually doing what he said he’d do – resigning.


There is, of course, no ethics in assuming that you can plunder your people with deficits and debts without the rest of the world eventually noticing. That’s why Portuguese bonds continue to crash this morning (2-year Pig Paper yields hitting new highs of 6.83%). That’s how the broken handshakes are going to be priced in this brave new transparent world of Fiat Fool Finance – with a trashing of promissory notes that were based on lies.


Instinctively, whether you are watching American Idol or a piggy politician, you know when someone doesn’t pass the smell test. While fibbing is part of any political process, flat out lying is punished with much more asymmetric outcomes. There is an Instinctive Effort of every person in this world to find the truth.


The truth about sovereign debt is that more of it is not good. At least not when your country has crossed what we have called The Rubicon of deficit and debt ratios (as a percentage of GDP). As a reminder, those 2 critical risk management levels are as follows:

  1. Deficit/GDP greater than 9%
  2. Debt/GDP greater than 90%

If you are reading this note in America this morning, this should remind you that we will not be immune to crossing the proverbial Rubicon of Fiat Fool Finance.


Timing unknown. Fundamentals known.


As the Japanese press toward 210% Debt/GDP, if you didn’t know the Japanese Bureaucrats have already handcuffed their citizenry’s long-term liberty with these liabilities, now you know…


Socrates (the 399 BC one) was penning his thoughts about ethics 3 centuries before Julius Caesar finally crossed The Rubicon. For Caesar, that meant passing the point of no return. That was the beginning of the end for the professional politicians of the Roman Empire. On that historical score, today is a very good day for Portugal’s version of Socrates. The People refuse to be plundered.


As Bastiat predicted in 1850, in plundering The People, “in this you will not succeed… so long as the legal plunder is the basis of legislation within” (“The Law”, page 15). And behold that Instinctive Effort of The People of Portugal this morning – they refuse to let Big Government Interventionists plug them with austerity measures any longer. They’d rather see the aristocracy, who gets paid by the bond market, fail.


Back to the grind…


Not surprisingly, the immediate-term reaction in both US and European stock market futures to this “news” is that if the market isn’t going down immediately on this, well we better suit up in our BTD Gear and chase these suckers higher…


To a degree, this illustrates the continued short-term performance pressures building within the temples of the hedge fund community. For 2011 YTD, how else would you explain a stock market like Greece’s being the world’s best performer?


Drum-roll… it’s called short covering in consensus short ideas…


Been there, done that – and I’m actually still trying to do it every day. How does a “fundamental” long/short Risk Manager make money shorting Fiat Fool countries who think “This Time Is Different” (Reinhart & Rogoff, 2009) when anyone who hasn’t been living under a rock for the last 18 months knows how this movie will ultimately end? Evidently, you wait, patiently, on price.


As a refresher, there is this thing in risk management called mean-reversion. Those who subscribe to it know that what crashes, eventually bounces – and what bubbles, eventually pops…


For the year ended 2010, the 3 worst performing stock markets in the world were:

  1. Greece = DOWN -35.6%
  2. Spain = DOWN -17.4%%
  3. China = DOWN -14.3%

In 2011, for the YTD, the tables have turned:

  1. Greece = UP +13.9%
  2. Spain = UP +8.0%
  3. China = UP +4.9%

So, I guess it’s a good thing we’re long China after being bearish on Chinese stocks for the last year…


Ultimately, whatever crack-pot “strategist” tells you this all means Greece, Spain, and Portugal are all systems go now probably missed proactively making the call 2 years ago that these stock and bond markets would selectively self-destruct on multiple durations.


Net net net, our long-term call on this gigantic Keynesian experiment going very bad remains as follows:


1.   Crossing The Rubicon of deficits and debt ratios will ultimately result in governments and their promissory notes self destructing

2.   Debauching the value of fiat moneys will result in both Price Volatility and The Inflation

3.   Fiat Fools and their policies to inflate will ultimately go away


They won’t go away forever. That’s Wall Street. You always bring in a new cattle class to bank and broker commissions. But Roman history and 1970s Style Stagflation fans alike remember Caesar as well as they remember Nixon – with an Instinctively Effortless smell.


My immediate-term support and resistance lines for WTI Crude Oil are $101.78 and $106.98, respectively. My immediate-term support and resistance lines for the SP500 are 1280 and 1309, respectively. Manage your risk around these ranges.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Instinctive Effort - Chart of the Day


Instinctive Effort - Virtual Portfolio

Buffett's Politics

“Most of those in political office, quite understandably, are firmly against inflation and firmly in favor of policies producing it.”

-Warren Buffett, May 1977


I’ve studied Warren Buffett very closely since I came to America in the mid 90’s. I wrote my Senior Thesis about him while I was an undergrad at Yale. I’ve applied many of his value-investing strategies to both the long and short side of my portfolios for the last 12 years.


Sadly, Buffett’s Politics have compromised the integrity of some of his post 2008 investment opinions. His 2010 testimony on Moody’s reminded me that if there is a transparent and accountable investment God on this good earth, it’s not him.  That said, if I were in his shoes, I’d probably game these government people for my own benefit too.


If you didn’t know that Buffett’s Politics largely focus on pushing his own book, now you know. His #1 priority has been, and always will be, generating returns for the shareholders of Berkshire Hathaway. If you think this jolly looking fella has you in mind when he sits down with The President of the United States, think again…


If you go back and study the late 1970s Buffett, you’ll find a man who didn’t need the market to succeed in order for his overall invested position to. In fact, I think if you go back and read the article that we snagged the aforementioned quote from (“How Inflation Swindles The Equity Investor” – Fortune Magazine, 1977) and change the date on it to 2011, you might think it was something Hedgeye’s Howard Penney wrote last night.


Ah the 1970s…


Those were the days when Growth Was Slowing As Inflation Accelerated. Those were the days when the US Government’s heavy hand of Big Intervention tried everything from the Fed monetizing America’s debt to both Nixon and Carter signing off on a debauchery of the US Dollar. Those were the days of the 1970s – days when plenty of buy-the-dip folks went away.


My defense partner (and Columbia Business School Value Investing Program graduate) Daryl Jones, wrote an outstanding research note intraday yesterday questioning the premise of buying-the-dip on “valuation” (email if you’d like a copy). Without rehashing the note in full, the conclusion was based on my old Yale professor’s (Robert Shiller) CAPE P/E multiple whereby the US stock market looks at least one standard deviation overvalued. 


We’ve been saying this since the start of the year, but it’s worth repeating. With corporate margins at 30-year highs, it’s unlikely that earnings will grow into their multiple. And while this wasn’t the topic of Buffett’s 1977 article on The Inflation, he’d be the first to remind you that you don’t buy a cyclical (the SP500) on peak earnings and peak margins of a cycle (you buy it before the cycle turns, like we did with the SP500 in March of 2009).


Back to what The Warren Buffett really thinks about The Bernank’s Inflation


1979 Shareholder Letter:


“Our book value at the end of 1964 would have bought about one-half ounce of gold and, fifteen years later, after we have plowed back all earnings along with much blood, sweat and tears, the book value produced will buy about the same half ounce.”


“The rub has been that government has been exceptionally able in printing money and creating promises, but is unable to print gold or create oil.”


“… but you should understand that external conditions affecting the stability of the currency may very well be the most important factor in determining whether there are any real rewards from your investment in Berkshire Hathaway.”


1980 Shareholder Letter:


“High rates of inflation create a tax on capital that makes much corporate investment unwise.”

“The average tax paying investor is now running up a down escalator whose pace has accelerated…”


“As we said last year, Berkshire has no corporate solution to the problem. We’ll say it again next year, too. Inflation does not improve our return on equity.”


Back to the morning Global Macro Grind


No matter where you go this morning, there is no “stability of the currency” in this country. The US Dollar is already down again for the week-to-date. There’s only The Bernank and The Inflation. Sure we can turn on the TV and watch the latest disciple of the Keynesian Kingdom cheer on the last leg of The Policy to inflate. But we don’t have to support them. We should fight them – out loud - and hold them accountable… before it’s too late.


Inflation is sticky. So … as Growth Slows, you end up with The Stagflation. This morning, you can see slower global economic growth being priced into many asset classes, across durations:

  1. Asian Growth Slowing – Thailand reported an industrial production growth number last night of -3.4% (year-over-year) for the month of February versus a +4.1% growth report in January. While growth slowing on the East Side of this world isn’t new news (we’ve been calling for it since November), it’s scary to think that the slowdowns were this sharp BEFORE Japan’s quake.
  2. European Growth Slowing – Germany, which has been our favorite Western Economy for the last 2 years, is starting to show the first signs of high-frequency growth data slowing in March. This is not good. Neither is all of the Pig Paper countries falling down on the sword of GDP “growth” promises for 2011 (Portugal revised expectations to negative y/y GDP growth last week).
  3. Dr. Copper Slowing – Copper prices are getting pounded again early this week, trading down -2.3% so far for the week-to-date. Critically, the price of copper is now broken on 2 of our 3 core risk management durations @Hedgeye with TREND line resistance now at $4.36/lb.

Now, quickly, the US-centric stock market bull should be yelling at me – “buy-the-damn-dip.” At least until month and quarter end on Thursday… (that’s when most of us get paid). But that’s not going to stop gravity. If you want to do that – and I mean stop The Inflation before you stop The Stagflation – you’ll need to have your local Central Planner in Washington re-read Buffett circa 1977.


My immediate-term TRADE lines of support and resistance for WTI Crude Oil are $100.34 and $107.94, respectively (we are long oil). My immediate-term TRADE lines of support and resistance for the SP500 are 1292 and 1323, respectively (we are short the SP500).


God bless America and a Strong US Dollar.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Buffett's Politics - Chart of the Day


Buffett's Politics - Virtual Portfolio


A sequential rather than YoY look at RevPAR suggested it was only a matter of time before RevPAR disappointed.



MAR announced today that worldwide Q1 RevPAR would fall at the bottom of the 7-9% guidance range due to only 5-6% RevPAR in North America.  MAR had previously guided to 6-8% for North America.  Although not cited by the company, weather probably played a part.  However, as we wrote about in "DISAPPOINTING JAN REVPAR" (02/28/11), we were already worried about Q1 RevPAR given that Q4 dollar RevPAR suggested close to a 10% YoY increase in the upper upscale segment.


We already thought the hotel companies would have to bring down full year RevPAR guidance.  Q2/Q3 is particularly troublesome given the big spike in seasonally adjusted RevPAR in April-July of 2010 which we attribute to pent up business travel demand.  As the following chart shows, RevPAR could actually go negative in June and/or July.  This is not a macroeconomic call.  It is a math call.  Year over year comparisons are not relevant due to the extreme volatility experienced in the sector for three years.




Despite the recent fall in lodging stock prices, valuations suggest investors still believe there is upside to estimates.  However, the math suggests otherwise.  At best, we think the lodgers may hit the bottom end of their guidance ranges due to margin control.  More likely, Q2 and Q3 estimates need to be reduced.  The Q1 conference calls in late April should be telling.

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%