This note was originally published at 8am on May 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.

“I feel dirty making money on the long side in this market”

-A Hedgeye Client that has been successfully making money on the long side


This quote comes from a client of hedgeye, who just happens to work for one of the largest “long only” money managers on the planet.  Why does he feel dirty?  He’s probably shares many of the same views that David Einhorn has had as he’s been covering his shorts.  The music is playing and the kids are Dirty Dancing.  The Chuck Prince of 2007 would approve. The grownups, however, do not.


David Einhorn had this to say, in the Greenlight capital Q1 Shareholder Letter: “The broad market, which shrugged off the continued escalation of commodity prices, unrest in the Middle East, a catastrophe in Japan, tightening monetary policy outside the United States and a deceleration of domestic economic growth...this quarter we were repeatedly confuzzled when we read company news announcements that we expected to cause falling stock prices, only to see them rise instead – and sometimes sharply at that.  Nonetheless, we believe that this environment is cyclical, and that it will continue this way... until it doesn’t.”   


Einhorn likens the market today to Charlie Sheen, believing that “all publicity is good publicity”.  Einhorn’s past record and thorough thought process that comes through in his writing are both impressive.  He is no Bud Fox; he understands the danger of investor psychology and groupthink.  Nevertheless, he is not confident that his firm can call the turn so he has been covering. 


Both Einhorn and the Hedgeye Client quoted at the beginning of this Early Look are thoughtful market operators that have generated alpha in different market cycles across sectors and geographies.  Clearly by the sentiments they are expressing, they are alerting us to a real problem that exists in money management at this point in equity markets.  Capital has been pumped into the system through two rounds of quantitative easing and PM’s that want to get paid will chase yield with that capital.  The stock market rally has been self-sustaining in that regard; a rising stock market does improve consumer confidence among higher income brackets.  However, the reception of all news as good news is disturbing to say the least.  As the multitude of interconnected global macro factors continue to change in real-time, the government is handcuffed with sky-high debt, zero percent interest rates, and slowing economic growth.


The pension fund community, too, has been dragged into this game of pass-the-grenade.  “Assumed” rates of return are to be hit lest the funds face a significant shortfall on their obligations.  Given the fear of inflation that has rightly taken hold, pension funds cannot look to bonds for the required 7-8% returns with interest rates at 0%.  Rather, pension fund managers are chasing yield right at the top of the cycle.  In fact, I would argue – although Keith may not agree (so this is not the official Hedgeye view) – that the cycle has already topped. 


Jobless claims have given back all of the progress that was made from January 2010 onward.  GDP slowed sequentially and sell-side expectations for GDP growth are coming back down to earth.   What’s more, Fed-sponsored inflation and price instability is the ultimate kryptonite for the economy as we head into 2H11. 


Osama bin Laden’s death is a great victory for the U.S. Military and the American people, but it is important to keep that in context from a market perspective.  Many market pendants are trying to spin this as a positive for the consumer and thus the overall market.  While it may have been yesterday, for a time, consider the day-to-day realities facing Americans.  Sky high gas prices, food costs, clothing costs, healthcare costs and declining purchasing power are a constant reminder to consumers of the fragility of the economy. 


Even if Bin Laden’s death is to have a long-lasting impact on markets, it may be a negative one if any retaliation or escalation of extremist terrorist activity causes an increase in the global risk premium and the cost of oil.  In fact, a poll conducted yesterday indicated that, of just under 10,000 respondents, 72% of people responded “No” when asked if they felt safer now that U.S. forces have killed Bin Laden.


The Dirty Dancers out there are counting their blessings that the market, perched on a precipice, is still on two feet thanks to the maintenance of the status quo.  Quantitative Easing sponsors bubbles and I believe that while earnings have been strong of late, many markets are taking on more and more of the characteristics of a bubble.  Dr. Rich Peterson uses three main parameters to describe a bubble.  First, it’s a great story.  Secondly, it has unlimited upside and finally, it is confirmed by higher prices.  An asset class that is exhibiting these characteristics is difficult to resist.  Pension fund managers and hedge fund managers alike are following market momentum as their performance targets require them to.


All the while, great stories are being told as to why the market should keep going up.  Inflation is “transitory”.  Japan’s catastrophe is not a big deal.  Oil prices are still not high enough to impact the consumer, according to some.  At the end of the day, all of these stories are supportive of higher equity prices.


How will it end?  This debate begins on the topic of debt and deficits.  Hedgeye believes that a country’s currency is a prescient indicator of its underlying economic health and we view the USD crashing as a bearish indicator, just as it was in 2008.  Warren Buffett’s recent quote on the impossibility of a U.S. debt crisis of any kind “as long as we keep issuing our notes in our own currency” is based on several obvious assumptions that neither Mr. Buffett nor anyone in the investment or bureaucratic community can be certain of.  The unexpected is unexpected for a reason.  That the political make-up of Washington D.C. will allow the federal government to continue on this road or to involve itself with the States’ debt issues remains to be seen.  


Part of the timeline of the USD Currency Crash call we’ve been making has been this literal moving target on the debt ceiling limit.  It was only three weeks ago that Secretary Geithner was doing some Dirty Dancing of his own, drawing a firm line in the sand that May 16th was the debt ceiling debate’s date with destiny.  Now, after 1Q11 GDP growth sequentially slowed and the dollar maintained its downward trajectory, Geithner has decided to join the festivities by pushing out the deadline to July 8th as of a few weeks back and now to August 2nd as of yesterday. “Extend and pretend” is a phrase that comes to mind.


In my view, the bottom line is this; there are some terrific story-tellers out there.  Whether it’s today on Osama bin Laden’s death being bullish for confidence but not for oil, that the global currency market will tolerate this crashing of the global reserve currency, or Secretary Geithner procrastinating in the hope that the market will give the dollar a bid, story-tellers abound.     


Lastly, this weekend I went shopping with my daughter for her prom dress.  After trying on at least thirty different dresses, the first twenty-nine were not good enough, she found the right one.  She has assured me that there will be no Dirty Dancing at the prom.


Function in Disaster; finish in style,


Howard Penney


DIRTY DANCING - Chart of the Day


DIRTY DANCING - Virtual Portfolio

Employing Liberty

“Freedom and liberty are now words so worn with use and abuse that one must hesitate to employ them.”

-F.A. Hayek


Earlier this week I gave some air time to Hayek’s chapter titled “The Abandoned Road.” The aforementioned quote comes from the same book (“The Road To Serfdom”). As you think about what Big Government Intervention has done to the US Dollar and The Correlation Risk it perpetuates in markets this morning, don’t forget that the Jobless Stagflation you see emerging from the Fiat Fools finest isn’t employing a sustainable economic recovery.


Both of these Keynesian ideologies are crocks:


1. Fiat Debt - that central planning policy of printing short-term debt (beyond 90% debt/GDP) to solve long-term liabilities is the best path to prosperity

2. Dollar Debauchery - the notion that having an implied monetary policy to devalue the currency and inflate is going to end in “price stability”


What we have here folks is The Price Volatility.


We’ve seen a version of this movie before. Not unlike the Keynesians begging The Bernank to provide markets with “shock and awe” interest rate cuts to zero percent in 2008, this time our professional politicians on Wall Street and in Washington have begged for The Quantitative Guessing.


What has that done for the country?


Well, consider the order of events (causality) that drove The Correlation Risk to lead to the largest weekly decline in oil prices since, you guessed it, 2008:

  1. The Bernank panders to the political wind at the April FOMC meeting keeping all rate hikes off the table
  2. The US Dollar Index proceeds to test its all-time lows in the last week of April (same levels reached in Q2 of 2008)
  3. Energy stocks hit YTD highs on April 29th (month end)

Then, the US Dollar stops crashing (USD = UP +1.6% for this week-to-date)… and commodities start crashing…


Nice. What else happened?

  1. US stocks are down every day since April 29th…
  2. Silver prices have their biggest down week since 1975…
  3. The Volatility Index (VIX) is up +23.4% for the week-to-date…

Cool, right?


The Keynesian Kingdom calls this The Price Stability.


Let me tell you what a small business owner (me) thinks about price volatility - I am less confident to run out and hire people.


That’s why you see weekly US jobless claims breaking out to the upside again (474,000 this week versus 429,000 last week). That’s why you see the Bloomberg weekly consumer confidence reading drop to minus -46.1 this week versus -45.1 last. That’s what volatility does to real businesses with real people making real life risk management decisions.


What’s the answer to this colossal problem of common sense? Get out of the way.


That’s right, the potty trained Risk Managers in financial markets can handle the truth. We are accountable for getting run-over in our long Gold and Oil positions this week. We can handle it – Yes We Can.


As Hayek astutely observed in 1944: “Perhaps the greatest result of the unchaining of individual energies was the marvelous growth of science which followed the march of individual liberty from Italy to England and beyond.” (“The Road To Serfdom”, page 69)


He was talking about the 150 years of industrialization in this world pre WWI (see Chart of The Day below, which I think I have been using in every client presentation for 2 years). The Federal Reserve Act of 1913 doesn’t look so swell for the median global inflation rate on this chart. That’s when the Fiat Fools took over from the Gold Standard … and the financial engineering revolution began.


Fully loaded with yesterday’s drawdown in oil prices, don’t forget that the all-time high price for a barrel of oil (nominal) on an annualized basis was $101/barrel in 2008. Correcting to the all-time high yesterday isn’t called a crash – it’s called a reminder.


Yesterday was one more reminder that we have a choice in this country. We can take our “free” markets back – but first, we have to re-teach ourselves what Employing Liberty’s definition to our lives and markets really means.


What to do from here?


Well, after badgering myself about it at the YTD top, I’m still short the SP500 (SPY) but think it has every opportunity to bounce to another lower-long-term high. My immediate-term TRADE lines of support and resistance for the SP500 are now 1331 and 1351, respectively.


I took down our exposure to Commodities this week to 12% in the Hedgeye Asset Allocation Model by selling our long position in Corn (CORN) and then taking our long Oil and Gold positions to 6%, respectively. If Oil can’t hold its intermediate-term TREND line of support of $98.63 in the next three trading days, I’ll likely sell it all too. The market owes me nothing in this or any other position.


Gold looks much different than Silver or Oil at this point (lower VOLATILITY studies across durations in my models and less concerning PRICE/VOLUME factoring). My Immediate-term lines of support and resistance for Gold are now $1482 and $1523, respectively.


Happy Mother’s Day to my Mom, Mrs. Scott, and Laura, and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Employing Liberty - Chart of the Day


Employing Liberty - Virtual Portfolio

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TODAY’S S&P 500 SET-UP - May 6, 2011

In the Correlation Risk post earlier this week we called out this 73.40 USD Index level as a very immediate-term trigger line. The good news is that as of yesterday, we’re through that line and the biggest wave of guys being forced to take down exposure to the most crowded macro trade (net long and gross exposure) in hedge fund history (The Inflation trade, brought to you by The Bernank).  As we look at today’s set up for the S&P 500, the range is 20 points or -0.31% downside to 1331 and 1.19% upside to 1351.



After yesterday’s downdraft, the Hedgeye models now have 3 of 9 S&P Sectors bearish TRADE and TREND (XLF, XLE and XLB) – they were the 1st 3 sectors to crack when we made our May Showers call in 2010 too. In order of preference, the best places to hide are long Tech (XLK) and Healthcare (XLV).




THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: -738 (+400)  
  • VOLUME: NYSE 1113.48 (+4.11%)
  • VIX:  18.20 +6.56% YTD PERFORMANCE: +2.54%
  • SPX PUT/CALL RATIO: 1.94 from 2.08 (-6.77%)



  • TED SPREAD: 26.32 0.507 (1.964%)
  • 3-MONTH T-BILL YIELD: 0.02% -0.01%
  • 10-Year: 3.18 from 3.25
  • YIELD CURVE: 2.60 from 2.65 



  • 7:30 a.m.: Fed’s Yellen speaks on economic growth in Finland
  • 8:30 a.m.: Payroll report
  • 10 a.m.: Fed’s Dudley to speak at economic briefing in NY
  • 11 a.m.: Fed’s Bullard to speak to bankers in Little Rock, Ark.
  • 1 p.m.: Baker Hughes Rig Count, prior 1818
  • 3 p.m.: Consumer credit, est. $5b


  • US manufacturers of all sizes having trouble finding skilled workers - WSJ
  • Sen Charles Schumer leaning toward backing Deutsche Boerse bid for NYSE Euronext - WSJ
  • China is closely watching the debate over raising the U.S. debt ceiling and wants the Obama administration to do more to curb the deficit - Vice Finance Minister  Zhu Guangyao



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Commodities Plunge for a Fifth Consecutive Day on ‘Panic’ Among Investors
  • Crude Oil Falls a Fifth Day; Poised for Biggest Weekly Decline Since 2008
  • Silver Set for Worst Weekly Drop Since 1975 Amid Rout in Commodity Prices
  • Copper Heads for Largest Drop in Eight Weeks as Central Banks Raise Rates
  • Corn, Soybeans Drop as Investors Bet Demand Will Dry Up on Higher Prices
  • Coffee Falls as Rising Robusta Stockpiles Cap Rally; Sugar, Cocoa Slide
  • Oil Bubble Pops as Bin Laden Death Triggers Four-Day Rout: Energy Markets
  • Palm Oil Futures Plunge for a Third Day, Tracking Decline in Commodities 



THE HEDGEYE DAILY OUTLOOK - daily currency view




  • European equity markets trading flat to lower
  • Germany Mar Industrial output +0.7% m/m vs consensus +0.5% and prior +1.7% revised from +1.6%
  • UK Apr PPI:  input +17.6% vs consensus +16.3%; output +5.3% vs consensus +5.1%; core output +3.4% vs consensus +3.0%
  • Spain GDP +0.2% in 1Q11, matching the 4Q10 growth rate, and +0.7% YoY - The Bank of Spain







  • Asian markets mostly lower, with commodity stocks hurt by lower oil and metals prices.
  • Australia’s dollar strengthened the most in two weeks after the Reserve Bank increased forecasts for inflation and said higher interest rates may be required “at some point.” @Bloomberg











Howard Penney

Managing Director


Street too low, FCF yield too high



ASCA reported a blockbuster quarter this week, beating our EPS estimate by 9 cents and consensus by 12 cents.  Margins were particularly strong and management’s outlook was favorable.  But we don’t want to rehash the quarter.  To quote Larry Kudlow “the mother’s milk of stocks is earnings” and we think strong earnings going forward and an attractive free cash flow yield will propel ASCA still higher. 


We turned positive on ASCA with our 3/24/11 post “ASCA: FCF AND EARNINGS” (3/24/2011) where we stressed its attractive free cash flow yield and potential for higher than expected earnings.  While the stock has risen over 30% since then, the good news is that we’re essentially in the same situation.  Thanks to an incredibly accretive (earnings and free cash flow) refinancing and stock buyback, ASCA’s free cash flow yield remains over 20% and earnings estimates still need to go higher.  As we’ve pointed out, for ASCA that combination has historically resulted in significant share appreciation. 


Street estimates on Q2 and FY 2011 and 2012 are still too low.  We’re 10% and 23% above consensus Q2 EBITDA and EPS, respectively.  For fiscal year 2011, we’re 8% and 31% higher than consensus.  The Street seems to be underestimating the accretion from the refinancing and buyback and more importantly, continued margin improvement and revenue growth.  Remember, ASCA’s number one competitor in virtually all of its markets is Harrah’s (Caesar’s).  Have you seen a Harrah’s property lately?  When every nickel is going to pay down debt rather than buying slot machines from the current decade, it becomes tough to maintain share.


On any valuation metric, ASCA looks very cheap – yes even P/E!  On 2012, ASCA trades at 6.3x EV/EBITDA, 8.5x earnings, and carries a FCF yield of 21%.

TBL: Textbook Lesson For All

If you want a textbook example in when to buy and sell retail names, check out TBL. Sometimes the best call is to do nothing.



The Timberland quarter is such a great lesson for anyone who cares about any company touching the retail supply chain. While we love to dig into the nitty gritty details more than anyone, sometimes you simply need to look at the calendar, a stock chart, and understand the motivational drivers behind what makes the company tick.  This is one of those instances.


Specifically, recall that on the company’s 2Q conference call, CEO Schwartz altered the revenue strategy for the company. After years of pulling distribution (voluntary and involuntary) of its classic ‘yellow boot’ business, and then restricting distribution further as it tiered product to build demand under Gene McCarthy (who now heads UnderArmour’s footwear business), he said something to the tune of “our consumer wants our product, so we’re going to give them the product!!!” The triple exclaimation point there is to try to capture his tone, which was more cocky than it was aggressive.  The market liked it, and the stock popped 20% in a week.


Then when TBL printed 4Q results, it blew away  growth expectations. The stock was up another 25% in just 2 sessions.


But today’s results resulted not only in a miss, but in a flat-out horrible earnings/cash flow algorithm. Revenue growth of 10% was de-levered to operating profit decline of -29% with receivables and inventories up 13% and 37% (!), respectively. We won’t debate the company’s assertion that this is needed to hit their growth plans, but we will question the margins that will be realized to achieve such growth.


Simply put, this is just a great case of management behaving badly.


I’ll be the first to admit how I kicked myself for missing that positive move in the stock on that mid-February day. But I’d have kicked myself harder for participating in the “capital destruction gong show” that was TBL’s 1Q.  


Yes, we want to be right all the time. Every quarter, every month, and every day. But sometimes the best strategy is to sit back, stick to your guns, and do nothing.



This is the gnarliest looking SIGMA we've seen all year.Let us know if you need help interpreting.

TBL: Textbook Lesson For All - tbtb


TBL: Textbook Lesson For All - tbsshgma

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