Commodities are taking center-stage this earnings season with many companies raising commodity inflation targets for the year.


Specifically this earnings season, we have seen the vast majority of companies increase guidance for 2011 commodity inflation.  This past week saw a downturn in many commodities as precious metals led the way with a violent snap back.  From Friday, however, commodities have bounced back and for agricultural commodities at least, the preponderance of the fundamentals point to the upside. 


WEN increased the mid-point of its inflation target for 2011 by 250 basis points to 5-6% on the back of beef cost concerns.  With grains moving higher, the outlook for beef is not favorable and many companies may have guided conservatively in this regard.  Of course, the direction of the US Dollar is critical in this discussion and – for now – our Macro Team’s view is that the policy, rhetoric, and calendar all point to further weakening of the buck over the intermediate term TREND.

The table below details the commodities we track, ordered by magnitude of the most recent weekly price move:





Below I detail three significant commodities that have made significant moves week-over-week.





Coffee prices abated somewhat over the last week, declining by 7.7% as numbers from Brazil suggest that production during the 2011/2012 Arabica Season may exceed expectations.  However, near-term catalysts may still cause additional volatility such as mudslides in Venezuela and other weather-related events.  In general, consensus is suggesting that the upcoming crop will be far better than last year’s.  However, as the chart below shows, there is a severe level of inflation in the price of coffee and any near-term shocks could further squeeze the coffee concepts and bring about further price increases.







Wheat prices gained on what was a soft week, overall for commodities.  A severe drought in Russia had a severe impact on wheat prices in 2010 and now, it seems, adverse weather conditions from Asia to Europe to North America is impacting global wheat crop yields.  Due to excess rain, corn planting in the U.S. is advancing at half of last year’s pace because of excess rains, according to government data.  PNRA has its wheat costs locked for 2011 but, to the extent that prices continue to gain, the laddering mechanism by which they purchase their wheat could bring pressure to the cost of sales line. 





Chicken wings


Chicken wings continue to March lower week-over-week.  Wings are down 37% year-over-year.  Excluding chicken wings and broilers, the commodities in our commodity monitor table are up an average of 39% year-over-year.





Howard Penney

Managing Director


TODAY’S S&P 500 SET-UP - May 11, 2011


The three items of focus this morning;

  1. Chinese Growth Slowing is a year old – Chinese inflation slowing sequentially is new “news” to the Street, but a core component of why we are bullish on China for the back half of 2012 (CPI and PPI slowed sequentially in April to +5.3% and +6.8%, respectively)
  2. Growth oriented inflation readings in the commodity market (supply/demand, Copper, Cotton, etc) continue to negatively diverge from monetary inflation (Gold up again this morning to $1524, breaking out above an important line of resistance at $1521)
  3. US stock market sentiment comes in hot from what I called out in my midweek note last week (that’s bullish on the margin); Investor Intelligence spread narrows by 400 bps w/w to 32.5 w/ Bulls dropping w/w to 51% from 55% (after stocks and commodities sold off)


As we look at today’s set up for the S&P 500, the range is 35 points or -1.56% downside to 1336 and 1.02% upside to 1371.




The Hedgeye models now have 7 of 9 S&P Sectors bullish TRADE and 8 of 9 bearish TREND.  The XLF is the only sector broken on both durations. 




THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: +1895 (+714)  
  • VOLUME: NYSE 835.48 (7.27%)
  • VIX:  15.91 -7.28% YTD PERFORMANCE: -10.37%
  • SPX PUT/CALL RATIO: 1.54 from 1.94 (-20.5%)



  • TED SPREAD: 23.87
  • 3-MONTH T-BILL YIELD: 0.03%
  • 10-Year: 3.23 from 3.17
  • YIELD CURVE: 2.64 from 2.60 



  • 7 a.m.: MBA Mortgage Applications, prior 4.0%
  • 8:30 a.m.: WASDE grains
  • 8:30 a.m.: Trade balance, est. (-$47.0b), prior (-$45.8b)
  • 10:30 a.m.: DoE inventories
  • 12:15 p.m.: Fed’s Lockhart speaks in Atlanta
  • 1 p.m.: U.S. to sell $24b in 10-yr notes
  • 1 p.m.: Fed’s Kocherlakota to speak in N.Y.
  • 1 p.m.: Fed’s Pianalto speaks in Cincinnati
  • 2 p.m.: Monthly budget statement, est. (-$41.0b)


  • Bullish sentiment decreases to 51.1% from 54.9% in the latest US Investor's Intelligence poll
  • BOE says later in 2011 there's a good chance CPI will reach 5%; more likely than not to exceed 2% throughout 2012 -- wires
  • FDA orders hip makers to conduct studies of the implants - NYT
  • Record labels asked Google for upfront payments of $75-100M for licenses for Music Beta - NY Post, citing source
  • AIG offering to be about $9B - WSJ
  • Banks put forward $5B number to end foreclosure probe - WSJ



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • World Sugar Market to See Surplus for Second Year, Lowering Costs for Coke
  • Biggest Oil-Gas Premium May Spur North America LNG Exports: Energy Markets
  • Copper Drops as Chinese Inflation Figures Stoke Policy-Tightening Concern
  • Gold Climbs for a Fourth Day on Chinese Inflation, European Debt Concern
  • Corn Advances Before USDA Stockpile Estimate; Wheat Gains for Fourth Day
  • Sugar Falls as Production Rises in India, Thailand; Cocoa, Coffee Slide
  • Sugar Output in India’s Top Producer May Reach a Record on Cane Harvests
  • Rubber in Tokyo Reaches One-Week High as Oil Gains, China May Boost Orders
  • Brazil May Become Net Aluminum Importer on World Cup-Fueled Metals Demand
  • Sugar Production in China Almost Flat Spurs Speculation of Rising Imports
  • Barrick’s Munk Says ‘Unorthodox’ Equinox Deal Will Help Fund Gold Mines
  • Silver Still Poised to Rally to $50, Merrill Forecasts: Technical Analysis
  • Ethiopia May Ban Coffee Exporters Caught Hoarding, Defaulting on Contracts




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • European markets are generally higher with Greece and Spain two of the best performing markets
  • Latvia and Turkey are notable underperformers
  • Germany Apr final CPI +2.4% y/y vs consensus +2.4% and prior +2.4%; Germany Apr final CPI +0.2% m/m vs consensus +0.2% and prior +0.2%







  • China April CPI +5.3% y/y vs consensus +5.2% - Dow Jones; April PPI +6.8% y/y vs consensus +7.0%
  • Asia traded higher; China was a notable underperformer











Howard Penney

Managing Director

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Profanity's Wings

“All hockey players are bilingual. They know English and profanity.”
-Gordie Howe


If you want to get bullish, let’s get bullish!


This morning I am going to shift my focus from Hayek to Hockey Town. Fans in Detroit, Michigan were rocking it out at the Joe Louis Arena last night as their Red Wings staved off elimination in the playoffs for Lord Stanley’s Cup.


While Mr. Hockey himself may have had a little Canadian storytelling in the aforementioned quote, I think we can give the man a break. He probably said it with a metal plate in his head. Gordie Howe played a world record 2,421 games of professional hockey at one speed – all out.


For those of you who don’t like hockey’s profanity and fighting, that’s ok – even if you preferred watching grown men tip toe on Dancing With The Stars last night, I guess I still have your attention. There’s this thing in hockey that the boys call a “Gordie Howe Hat Trick” – one goal, one assist, and one fight – and once in a while that’s what it takes to ride Profanity’s Wings to the promise land of victory.


If you’re bullish this morning, congrats. Virtually all of our longs are going up too. They tend to do that when the US Dollar goes down (our batting average on the long side of the Hedgeye Portfolio is probably unsustainable at +85.1%).


I can curse them. I can yell at them. I can call them names – no matter where I go this morning, there they are. America’s Central Planners are right back at it looking to solidify short-term political security by eroding America’s long-term credibility in financial markets.


After finally catching a short-lived short-covering bid last week, the US Dollar is down, again, every day this week.


If you’re keeping score where it matters, the market price doesn’t lie; politicians do:

  1. Week-to-date: US Dollar is down -0.5% and down for the 15th week out of the last 20.
  2. Year-to-date:  US Dollar is down -5.6% and down -8.1% since its YTD high.
  3. Obama/Geithner-to-date: US Dollar is down -15.3% (since they took office in February 2009)

This isn’t something anyone in this country should be proud of. This isn’t what I saw in the Boston Garden last week or in Detroit last night. This is a loser’s game – and it has been since Fiat Fools from France in the 1950s (Charles de Gaulle and the French Franc) to Nixon/Carter in the 1970s decided that The Inflation (via currency devaluation) was the best path to their short-term political prosperity.


But don’t worry about that. Everyone is a “long-term investor” all of a sudden, not a risk manager of long-term fiat policy cycles. Most Asian, European, and US stocks are up this morning – so are most of the inflation components embedded in them (yes, it does take the Energy sector to be up +12% for 2011 YTD to keep the SP500 up).


If you want to get bullish, let’s get bullish!


Last week after Big Alberta and I watched the Bruins pulverize the Flyers in Boston, I wrote a note titled “Ragingly Bullish Bears”, where I called out an important contrarian indicator in the weekly Investor Intelligence Bullish/Bearish Survey where the spread between Bulls and Bears widened to +36 points wide (Bulls minus Bears).


Here’s what that weekly sentiment survey did this week (on the margin, this is bullish):

  1. Bulls drop like stocks and commodities did last week (people get bearish after things go down) from 55% to 51%
  2. Bears rise up from hibernation from 16.5% (close to as asleep as they can be) to 18.5% this week
  3. Bull/Bear Spread tightens from +3600 basis points wide to +3250 basis points wide this week

So there you go. A Bernank Hat Trick of sorts for the Keynesian Kingdom – one more bullish data point to convince bulls to buy de-damn-dip again; one more reason for hedge funds to cover their shorts again; and one more step towards perpetuating more of The Price Volatility. Again!


All the while, Growth Is Slowing As Inflation Accelerates. Whether it’s measured from a Chinese, Indian, or Brazilian demand perspective or in supplies of copper, cotton, and Coyote fans – it’s all pretty obvious at this point. Big Government Interventions in policy structurally impair growth and confidence.


Oh, sorry – I meant to end on a bullish note.


All bulls are bilingual anyway. They know The Bernank and The Inflation.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1491-$1571, $100.26-$106.99, and 1136-1371, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Employing Liberty

This note was originally published at 8am on May 06, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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


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