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


Profanity's Wings - Chart of the Day


Profanity's Wings - Virtual Portfolio

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


Employing Liberty - Chart of the Day


Employing Liberty - Virtual Portfolio

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Wendy’s/Arby’s reported a disappointing quarter this morning.  Significant upside remains with the sale of Arby’s being the most important catalyst to this effect.


Wendy’s/Arby’s reported a poor quarter this morning.  Consolidated EPS came in at $0.01 ex-items versus consensus $0.02.  System-wide comps for Wendy’s came in flat versus consensus at +0.3%.  Arby’s North America system comps came in at +5.5% versus expectations of +2.1%.  1Q restaurant operating margins at Wendy’s and Arby’s were +13.4% and +10.6% versus consensus of 14.6% and 11.5%, respectively.  Arby’s has been on the block since January so, accordingly, much of the focus coming into the quarter was on the performance of Wendy’s.  MCD printing a strong first quarter was possibly a hint that comps could be disappointing and they were: Wendy’s company-owned comparable restaurant sales, in the first quarter, contracted -0.9% year-over-year.   Consensus was looking for +0.4%.  As the chart below indicates, Wendy’s company-owned comparable-restaurant sales still registered a sequential improvement in two-year average trends from 4Q10 and April is comping at +0.5%. 





April 2010 saw Wendy’s company-owned comparable restaurant sales decline 0.50% which, given the overall 2Q comp, implies that there was a significant fall-off over the following two-months in terms of comparable restaurant sales.  With this in mind, I would expect 2Q11 to come in closer to +2.5% to 3%.  Management reiterated FY11 guidance of +1% to +3% comparable sales growth at company-owned Wendy's restaurants.


Restaurant margins were a pressing concern coming into the quarter and the results showed that beef costs severely impacted margins at both WEN concepts.  As I wrote above, restaurant margins missed by 120 basis points and 90 basis points at Wendy’s and Arby’s, respectively.  At Wendy’s, the 200 basis-point year-over-year decline in margins was attributable to incremental advertising to introduce Wendy’s new breakfast in new markets and 80 basis points due to higher commodity costs. 


The overall commodity basket is now forecasted to grow 5-6% in 2011 due to an increase in beef costs of 20%.  In March, the company had guided to total commodity inflation for 2011 of 2-3% on the back of beef cost inflation of 10-15%.  Along with this revision, management has revised its EBITDA estimate for 2011 to be in the $330-340 million range versus the previous range of $345-355 million.  While management has stressed that 2011 represents a “transition” year for the company, it is clear that WEN is going to suffer more than most through the inflationary environment in 2011. 





Looking forward, two things stand out.  The first is the outlook for Wendy’s and the second is the sale of Arby’s – a move I have advocated ever since the acquisition (which I opposed).  Wendy’s is introducing Dave’s Hot ‘n’ Juicy cheeseburgers in the second half of the year.  Currently in seven test markets, WEN has high hopes for this launch as they see significant increases in hamburger unit sales.   Overall for 2011, I expect the commodity environment to pose a strong headwind for the company but the increased focus on the core menu, complimented by an increased focus on Wendy’s following the sale of Arby’s, should bring about significant progress at Wendy’s.


The sale of Arby’s was a welcome progression in my eyes and one of the main factors that convinced me that management means business in this particular turnaround effort.  The primary benefit of a sale would be management’s undivided attention being dedicated to Wendy’s.  Secondarily, the sale would deleverage the company’s balance sheet.  The $200 million of capitalized lease obligations on Arby’s balance sheet would be off the company’s books and this, along with the cash proceeds from the sale, would afford the company increased financial flexibility going forward. 


The 300 basis point upward revision in commodity inflation expectations is weighing on earnings potential for the year but the overall transition to a more focused and profitable company seems on track.  As Wendy’s new menu items continue to gain traction, management becomes more focused on operations at one concept, and the company has a healthy balance sheet to enable it to invest in the brand, I expect WEN to be a top-performing QSR stock over the next couple of years.



Howard Penney

Managing Director


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