The Fiat Flock

“They would be our shepherds, and we are to be their flock.”

-Frederic Bastiat


After watching Maria Bartiromo interview Chicago Federal Reserve Bank President Charles Evans yesterday into the market close and then watching The Bernank shepherd the financial media into taking his word for it on The Inflation last night, I thought about becoming a sheep.


Or should I rethink my being in this interconnected Global Macro game of risk as a lemming? Perhaps a monkey? Or a donkey? Ah, so many attractive career options are available if I were to accept the wishes of the overlords of the Keynesian Kingdom and become a member of The Fiat Flock


Born in France in 1801, then orphaned at the age of 9, Bastiat penned the aforementioned quote when he wrote “The Law” in 1850. Not surprisingly, his work wasn’t well regarded by the French Socialists of his time. Neither was it promoted by Charles de Gaulle in the 1950s when his debt-financed-deficit-spending and devaluation programs destroyed both the franc and French credibility in global markets…


During days when the General-in-Chief of the US Federal Reserve (Bernanke) is more left leaning and socialist than the ex-Finance Minister of France turned head of the European Central Bank (Trichet), I think it’s worth taking a moment this morning to consider America’s constitutional definition of liberty as an alternative to this wanna be Centrally Planned world.


The Bastiat Questions (“The Law”, page 46):


“The pretensions of organizers suggest another question, which I have often asked them, and to which I am not aware that I have ever received an answer: Since the natural tendencies of mankind are so bad that it is not safe to allow liberty, how comes it to pass that the tendencies of the organizers are always good? Do they consider that they are composed of different materials from the rest of mankind?”


The Implied Answer (“The Law”, page 46):


“They have, therefore, received from heaven, intelligence and virtues that place them beyond and above mankind: let them show their title to this superiority. They would be our shepherds, and we are to be their flock.”


So how do you feel about that? How do you feel about American central planners debauching the longstanding entitlement we’ve had to the definition of a “free market” system? What’s so free about a market whose every breath of weaning volume depends on The Bernank’s heavy hand?


It’s sad to watch.


Back to this morning’s Global Macro Grind


The Top 3 headlines this morning are:

  1. “UConn beats Butler for the National Championship”
  2. “Texas Instruments To Buy National Semiconductor”
  3. “Bernanke Says Fed Must Monitor Inflation Extremely Closely.”

Great news for UConn and National Semi – but what’s up with The Bernank? What exactly does monitoring inflation “extremely closely” mean? Were our shepherds monitoring The Inflation somewhat closely before food prices hit all-time highs?


I don’t know how else to say it, so I’ll say it like the Chinese just did this morning by addressing The Inflation head on and raising China’s benchmark interest rate. If we’re not going to address reality about oil at $108/barrel, a new leader in the global financial system will. Don’t think for a New York minute that China didn’t do this in Bernanke’s face this morning for a reason.


China waited on Ben Bernanke’s speech to The Fiat Flock in Georgia last night. This what he said:


“So long as inflation expectations remain stable and well anchored… the increase in inflation will be transitory”


No, dear hard working red-white-and-blue-collared Americans, I couldn’t make that quote up if I tried. Yes, Bernanke makes up his own “forecasts” about matters like growth and inflation all of the time – and, yes, his forecasting track record speaks for itself. It’s terrible.


On Growth:

  1. Bernanke is still forecasting 2011 US GDP growth of 4% to Infinity and Beyond…
  2. The Street, including both Goldman and Bank of America, is cutting GDP growth estimates closer to the Hedgeye estimate

On Inflation:

  1. Bernanke calls inflation expectations well anchored and prices “stable”
  2. The Market, including Commodity and Volatility prices, is flashing the highest food prices and gyrations in price volatility, ever…

As we like to say at Hedgeye, Mr. Bernanke, ever is a long time…


There has never been a Federal Reserve Chairman who has overseen more Americans on food stamps (44 million people and counting). There has never been a Federal Reserve Chairman who has overseen 3-week explosions of price volatility (VIX) on the order of +40-60%, and then draw downs to higher-lows that are the most expedited in market history (7 days in March = VIX down -41.6%).


We are not your Fiat Flock. We do not trust your “forecasts.” And we want our markets back.


My immediate-term support and resistance lines for WTI Crude Oil are $105.91 and $108.92, respectively. My immediate-term support and resistance lines for the SP500 are now 1318 and 1341, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Fiat Flock - Chart of the Day


The Fiat Flock - Virtual Portfolio



TODAY’S S&P 500 SET-UP - April 5, 2011


Dollar rises against euro and yen and the futures are looking lower as Bernanke says Fed will act if inflation more than “transitory.”  As we look at today’s set up for the S&P 500, the range is 23 points or -1.12% downside to 1318 and 0.61% upside to 1341.




We are on day 2 of perfect with 9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.    


THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: 225 (-908)  
  • VOLUME: NYSE 770.67 (-14.57%)
  • VIX:  17.50 +0.57% YTD PERFORMANCE: -1.41%
  • SPX PUT/CALL RATIO: 2.15 from 2.22 (-3.40%)


  • TED SPREAD: 24.60
  • 3-MONTH T-BILL YIELD: 0.06% -0.01%
  • 10-Year: 3.45 from 3.46
  • YIELD CURVE: 2.68 from 2.66


  • 7:45 a.m.: ICSC Weekly retail sales
  • 10 a.m.: Treasury Secretary Timothy Geithner testifies to Senate panel
  • 10 a.m.: ISM Non-manufacturing, est. 59.5, prior 59.7
  • 11:30 a.m.: U.S. to sell $24b 52-week bills, $40b 4-week bills
  • 12:45 p.m.: Fed’s Kocherlakota gives remarks in Minneapolis
  • 12:45 p.m.: Fed’s Lockhart speaks in Stone Mountain, Ga.
  • 2 p.m.: FOMC minutes released
  • 4:30 p.m.: API inventories


  • French government revises 2012 growth down to +2% from 2.5%
  • Moody's downgrades Portugal's bond ratings to Baa1 from A3, still under review down
  • Poland’s central bank may raise its benchmark rate by 25bp to 4%
  • Australia’s central bank left its benchmark interest rate at the highest level in the developed world.
  • Nasdaq to reduce weighting of Apple in Nasdaq-100




THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Silver Advances to Most Expensive Versus Gold Since 1983 on Inflation Risk
  • Copper Rises in London Trading Before U.S. Services Report: LME Preview
  • Oil Drops First Day in Four on Signs U.S. Demand Easing as Supplies Gain
  • China's 8% Growth to Bolster Consumption of Copper, Aluminum, Chalco Says
  • Gold May Advance on Libya, Inflation Concern; Silver Reaches 31-Year High
  • Rubber Futures in Tokyo Reach One-Month High on Yen, Thai Supply Concerns
  • Corn Near 33-Month Peak on Shrinking Supplies as Wheat at Four-Week High
  • Cocoa Falls as Ivory Coast Conflict May Be Ending; Coffee Prices Decline
  • Beef, Pork-Price Gains Boosting U.S. Craving for Chicken: Chart of the Day
  • Australia Posts First Trade Deficit in Year as Disasters Disrupt Exports
  • Kazakh Uranium Miner Seeks to Raise India, U.S. Sales Before Possible IPO
  • Extract Expects to Fund $1.7 Billion Uranium Project Amid Reactor Crisis



THE HEDGEYE DAILY OUTLOOK - daily currency view





European markets trade lower with the periphery again in focus and particularly Ireland, Spain and Portugal; Turkey and Switzerland are bucking the negative trend.    


EuroZone Feb retail sales +0.1% y/y vs consensus +0.6% and prior revised +0.4% from +0.7%
Mar final Services PMI:

  • France 60.4 vs preliminary 60.7
  • Germany 60.1 vs preliminary 60.1
  • EuroZone 57.2 vs preliminary 56.9
  • UK Mar Services PMI 57.1 vs consensus 52.5 and prior 52.6








The Asian markets turned in a mixed performance; China, Hong Kong, and Taiwan were closed for Ching Ming Festival. Australia February trade balance (A$205M) vs consensus A$1.2B and the central bank  keeps interest rates unchanged, as expected.














Howard Penney

Managing Director

Blame Yourself

This note was originally published at 8am on March 31, 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 was a matter in which we have heard some other persons blamed for what I did myself.”

-Abraham Lincoln, 1862


That’s one of the many outstanding leadership quotes in the book I highlighted yesterday, “Team of Rivals – The Political Genius of Abraham Lincoln.” If he wants to get re-elected, President Obama should think long and hard about Lincoln’s example of transparency, accountability, and trust. Rather than giving lip-service to being like the great American leaders who came before him, Lincoln was his own man - and he lived these principles out loud.


Whether you like following politics or not, you need to get the direction of their leanings right if you want to get your Global Macro positioning right. Currency markets move on policy – policy is set by politicians. And while that’s a pathetic and sad statement about our said “free market” system altogether, you can’t get bogged down by it – you need to play the game that’s in front of you.


Currently, the most important game in Global Macro Risk Management is the cross-asset-class correlation-risk associated with what the US Dollar does. If you get policy right, you’re likely to get the US Dollar right. If you get the US Dollar right, you’ll get fewer things wrong.


This is where my only political advice to the President of the United States (or whoever realizes that they could win his office) comes into play – get the US Dollar right (strengthen it) and you’ll Deflate The Inflation. If you Deflate The Inflation, The People will believe in you.


Strong US Dollar Policy isn’t a partisan thing. It’s an American thing. Reagan had it. Clinton had it. Nixon and Carter devalued it. Nixon and Carter also had a Dollar Debauchery man at the Fed named Arthur Burns.


Reagan had Volcker. President Obama has The Bernank.


Obama will be the first to tell you he took on a lot of Bush’s baggage. He’ll be the last to tell you he made a mistake in taking on Bush’s Bernanke. So, Mr. President, let’s strap on the accountability pants, Blame Yourself, and take a walk down that path – because your General-in-Chief on all things US economic policy definitely won’t be doing it for you anytime soon. Some of his Generals in the Fed’s ranks will.


In one of the great 2011 accountability headlines coming out of the US Federal Reserve last night, Kansas City Fed President, Thomas Hoenig, explained the following by effectively blaming himself:

  1. “Once again, there are signs that the world is building new economic imbalances and inflationary impulses…”
  2. “The longer policy remains as it is, the greater likelihood these pressures will build and ultimately undermine world growth…”
  3. “…remember, I’m not advocating tight monetary policy… I’m advocating a non-crisis policy. Zero is a crisis policy that by itself should be temporary.”

Now this isn’t Hoenig’s first rodeo. He joined the Federal Reserve Bank of Kansas City in 1973. He is the longest serving member at the Fed and his 8 consecutive “dissents” (English for publically disagreeing with The Bernank) recently tied Henry Wallich’s 1980 record for most disagreements with Fed policy (Wallich has been validated as being very right). Hoenig is a known inflation hawk – most likely because he faced it in the 1970s and joined Wallich and Volcker in fighting it.


Does the President of the United States really want to test the waters on $120/oil and 1970s style Jobless Stagflation? Does he want to roll the bones on The Quantitative Guessing experiments in Japan gone bad? Does he want to run against someone in 2012 who will crush him like a bug with the simple conclusion that Growth Slows As Inflation Accelerates?


I don’t think so. Remember, he’s a professional politician – after all…


As opposed to someone holed up in a room of academia’s Keynesian Kingdom, I’m in the soup. I’m managing risk in this cross-asset-class correlation-risk game each and every day. I have been writing these morning strategy notes since I started this firm without bailout moneys 3 years ago – and I’ve made 19 calls on the US Dollar since (long and short side) – and I’ve been right 19 times. If you want a USD opinion – at least ours has some credibility.


Call me politically irrelevant. Call me Canadian. Call me names from the heavens, Mr. Big Government Intervention man. But don’t call me a McClellan (1862) in this currency war, because it’s The US Monetary Policy that’s managed by you, the unaccountable generals, at the front of The Inflation lines who are perpetuating the problem.


Back to the Global Macro Grind


Now that the IMF is cutting their US GDP Growth estimate for 2011 this morning (to 2.8%), I’ll assume that our call for Growth Slowing As Inflation Accelerates is being absorbed into the craws of consensus. The leading indicator that is the price of Dr. Copper remains bearish and broken with intermediate term TREND resistance (which was longstanding support) at $4.38/lb.


Consensus doesn’t mean that Growth Slowing signals don’t continue to flash amber lights – it simply means the 6.5% intra-quarter SP500 correction had more to do with a longer-term global reality (piling sovereign debt-upon-debt-upon debt structurally amplifies inflation and impairs growth) than a tsunami of complacency.


Japanese and Chilean Industrial Production Growth reports for February (pre quake) came out yesterday and both slowed again sequentially. Eurozone inflation (CPI) for March accelerated again, sequentially. And while the US Dollar trading up for 2 of the last 3 weeks has helped Deflate The Inflation this week (bullish for Equities), it looks like that reverts back to the mean of Burning Buck and up oil again this morning. I’m staying long oil and long gold.


My immediate-term TRADE lines of support and resistance for oil are now $102.13 and $107.95, respectively. My immediate-term TRADE lines of support and resistance for the SP500 are now 1305 and 1333, respectively.


Looking forward to seeing everyone at Hedgeye Soho’s launch party in NYC this evening – no government bailout moneys required for us to buy you drinks.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Blame Yourself - Chart of the Day


Blame Yourself - Virtual Portfolio

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Notable news items and price action from the last twenty-four hours

  • SBUX CEO Howard Schultz spoke at an event in San Francisco last night and spoke on the need for companies to do more for staff benefits, the importance of local relevancy in China, and the mistakes SBUX has made in China.
  • PFCB was upgraded yesterday to “Buy” from “Neutral” at Janney Montgomery.  The stock gained on accelerating volume yesterday.
  • RUTH gained 2% on accelerating volume yesterday.
  • CMG has chosen Rokkan, a New York-based digital agency, for several digital marketing and brand awareness initiatives for 2011.  Rokkan will be working with CMG to develop its digital marketing and execution including online sales, customer service infrastructure, local store marketing strategy, and out-of-store ordering through mobile and web on
  • Pret A Manger continues to grow in the U.K. despite the shrinking services industry in that country.
  • As a result of the Latin America beverage agreement, PepsiCo will now become the largest soft drink provider for BKC restaurants in LatAm markets.
  • BNHNA results released yesterday revealed that, for the third four-week period, both total restaurant sales and Company-wide comparable restaurant sales increased 7.0% to $27.9 million from $26.1 million, representing the fourteenth consecutive period of comparable restaurant sales growth.
  • DENN said that its board has approved a 6m share repurchase program.




Howard Penney

Managing Director


New record despite low hold



March was another record month for Macau with total gaming revenues increasing 48% off of a 42% comp.  Growth in March was achieved in spite of low market hold.  Assuming direct play of 8.7% or RC of $6.1BN, March hold was only 2.60% compared to a hold of 2.67% in March 2010 (assuming 7.0% direct play or $3.1BN).  If hold in both periods was 2.85%, March YoY GGR growth would have been up 50%.


Every property that we track appeared to have below normal hold, with the exception of Starworld and MGM.   The US operators lost share to their Asian competitors – specifically SJM and Galaxy.  MGM experienced its third best market share since opening and should have another good quarter although hold was much lower sequentially.  MPEL also had a standout month in March volume-wise but experienced some very bad luck in VIP and we think Mass. 



Y-o-Y Table Revenue Observations:


Total table revenues grew 48% YoY this month despite low hold in the month, with Mass growth of 31% and VIP growth of 54%.  Junket RC grew 55% in March.


LVS table revenues grew 17%

  • Sands was up 10%, driven by a 2% increase in VIP and a 23% increase in Mass
    • Despite an easy comp, hold continued to impact Sands for the second month in a row.  Junket RC chip grew 19%.  Hold, adjusted for 15% direct play (in-line with 4Q10), was about 2.2%, compared to 2.6% hold in March 2010, assuming a 10% direct play estimate (in-line with 4Q09)
  • Venetian was up 15%, driven by a 7% increase in Mass and 21% increase in VIP
    • Junket VIP RC increased 42%.  Assuming 19% direct play, in-line with 4Q10, we estimate that hold was 2.7%, compared to 2.5% hold in March 2010 (assuming 21% direct play).
  • Four Seasons was up 41% y-o-y driven by 34% VIP growth and 85% Mass growth
    • Junket VIP RC increased 30%. Assuming 50% direct play, hold was 2.5% compared to an estimated hold of 2.7% in March 2010 assuming direct play levels were in-line with 4Q09 at 43%.

Wynn table revenues were up 57%

  • Mass was up 59% and VIP increased 57%
  • Junket RC increased 45%
  • Assuming 11% of total VIP play was direct, we estimate that hold was 2.5% compared to 2.3% last year (assuming 10% direct play)

MPEL table revenues grew 58%, driven by Mass growth of 59% and VIP growth of 42%

  • Altira was up 45%, with Mass continuing its tear, up 71% while VIP grew 43%
    • VIP RC was up 25%
    • Hold comparisons were easy in March. We estimate that hold was 2.7% compared to 2.3% last year.
  • CoD table revenue was up 70%, driven by 38% growth in Mass and 82% growth in VIP
    • Junket VIP RC grew 122% - more than any other property in Macau.  However, bad luck heavily impacted results - despite easy comps.  March 2010 hold was 2.5% (assuming 15.2% direct play) vs. 1.9% this month, assuming 18.5% direct play (compared to 19% in 4Q2010)

SJM revs grew 46%

  • Mass was up 28% and VIP was up 55%
  • Junket RC was up 55%

Galaxy table revenue was up 46%, driven by 39% growth in Mass and VIP growth of 47%

  • Starworld table revenues grew 49%, driven by 26% growth in Mass and 51% growth in VIP
  • Junket RC grew 38% at Galaxy Group and 40% at Starworld
  • Galaxy was the only concessionaire in March to hold above theoretical levels. We estimate that Galaxy held at 3.14% this month.

MGM table revenue was up the most in March, growing 96%

  • Mass revenue growth was 40%, while VIP grew 115%
  • Junket rolling chip growth was only second to CoD’s at 121.7%
  • Assuming direct play levels of 15%, we estimate that hold was 2.8% this month – in line YoY 


Sequential Market Share (property specific details are for table share while company wide statistics are calculated on total GGR, including slots):


LVS was the biggest share loser in March with share dropping 2.4% to 15.6% from 18.1% in February

  • Sands' share decreased 80bps to 4.8% - an all-time low for the property
    • The decrease was driven by a 70bps decline in VIP market share to 3.7%, an all-time low for property.  RC share was 4.1%, up 10bps sequentially, but below the 2010 average of 4.5%.
  • Venetian’s share plunged 2.2% to 7.9% from 10.1% in March – hitting a record low for the property
    • Mass share decreased 80bps to 14.1% from 14.9% in February (an all-time low for the property)
    • VIP share decreased 2.7% to 6.0% - the second worst month for the property after Jan 2011
    • Junket RC increased 10bps to 5.8%, which compares to an average of 6.3% share in 2010
  • FS share increased 20bps to 2.5%
    • VIP share increased 20bps to 2.7%
    • Mass share increased 10bps to 1.8%      
    • Junket RC share increased 10bps to 1.5%

WYNN's share decreased 1.2% to 14.0% from 15.2% in February, driven by a combination of low VIP hold and some share loss in Junket RC

  • Mass market share increased 70bps to 11.9%, compared to an average of 10.1% in 2010
  • VIP market share decreased 1.6% to 14.3% sequentially, below with its 2010 average of 16.0%
  • Junket RC share decreased 90bps to 14.7%, below Wynn’s 2010 average of 15.2%

MPEL's market share decreased to 14.1% from 15.2% in January – beating out Wynn by 10bps for 3rd place

  • Altira’s share increased 10bps to 5.2%
  • CoD’s share decreased 1.3% sequentially to 8.7% - 80bps above Venetian’s table market share!
    • Mass market share decreased 2.2% to 8.1%, lower than February's all-time high of 10.3%
    • VIP market share decreased 1.0% to 8.9% while Junket RC share increased 1.6% sequentially to 10.4% (compared with 5.8% share for Venetian).

SJM was the largest share gainer this month with total GGR jumping to 33.8% up from 30.6% in February. This was SJM’s best share month since April 2010.

  • Mass market share increased 1.5% to 40.8% while VIP share increased 3.8% to 32.8% (SJM’s best share in 40 months)
  • Junket RC share increased to 34.2% from 33.6% in February

Galaxy was the other big share gainer in March – gaining back its February losses (-2.3%) to 11.4% share

  • Starworld's market share jumped 2.5% to 9.6%
  • Share gains were largely VIP driven

 MGM's share decreased 80bps to 11.0%, from 11.8% in February

  • Mass share decreased 30bps to 8.2%
  • VIP share decreased 1.2% to 11.5% from 12.7% in February
  • Junket RC decreased 2.0% to 10.1%, above the property’s 2010 average of 8.4%


Slot Revenue:


Slot revenue grew 42.5% YoY in March to $118MM, just $2MM below February’s record month

  • MGM slot revenues grew the most at 109% reaching $19MM – a record for the property
  • At 74% YoY, Galaxy had the second best growth – granted, on a very small base. March slot revenue reached $4MM.
  • SJM grew 61% to $19MM
  • Wynn’s slot revenue grew 46% YoY reaching $24MM – the second best month for the property following a record February
  • MPEL’s slot revenues grew 37% reaching $23MM – setting an all-time high for the company
  • LVS had the slowest slot growth at 10%, granted off of the highest base. Slot revenues were $30MM.







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