• CBRL - Q3 EPS of 58c misses by 8c. Revenue of $582.5m misses.
  • BEEF PRICES - Cash cattle have fallen 13 percent since the spring highs, and the decline represents $150 reduced value in the total price of a market-ready steer.  Demand for both pork and beef was called gloomy last week and lower fed cattle prices helped packers regain some margins on slaughtering and processing. The seasonal expected boost in demand has failed to materialize for beef - CattleNetwork
  • Sandwich giant Subway is testing a more upscale format called Subway Café, which the company hopes will address the needs of franchisees looking to open in office buildings and other more high-end venues - NRN
  • The National Restaurant Association Restaurant, Hotel-Motel Show kicks off Saturday at Chicago's McCormick Place. 
  • RRGB - Strong follow thru from last week performance on accelerating volume
  • GMCR and PEET continue to trade higher on strong volume
  • JACK - continues to struggle to gain traction
  • CHUX - Strong follow thru following a better that expected quarter






Howard Penney

Managing Director

CHART OF THE DAY: The Last Stand of the Equity Bulls


CHART OF THE DAY: The Last Stand of the Equity Bulls - Chart of the Day

The Last Stand of the Equity Bulls

“There are not enough Indians in the world to beat the 7th Cavalry.”

-George Armstrong Custer


I’m in the middle reading Nathaniel Philbrick’s book, “The Last Stand”, which is an account of General George Custer’s infamous defeat at the Battle of the Little Bighorn.   Even a novice in American history knows the outcome of June 25th, 1876, a day in which the 7th Cavalry Regiment was soundly defeated by the combined forces of the Lakota, Northern Cheyenne, and Araphao people on the Montana plains.


In total, according to archeologist reports, the 7th Cavalry suffered a 52% casualty rate.  The five companies that were directly under the control of General Custer fared much worse.  Near the end of the battle, Custer, and the troops directly under his control, found themselves in a weak strategic position on a hilltop, which would become known as Last Stand Hill.  According to almost all accounts, the Lakota completely annihilated 100% of Custer’s troops within an hour of initial engagement.   


Ironically, despite the inauspicious ending to his military career, George Armstrong Custer was probably one of America’s most celebrated cavalry commanders of his era.  While he finished last in his class at West Point, Custer had a meteoric rise in the Union army and at the age of 23, three days prior to the Battle of Gettysburg, was promoted to Brigadier General. 


At Gettysburg, Custer was credited with leading a mounted charge of the 1st Michigan Cavalry.  This charge halted the Confederate momentum at the Battle of Gettysburg, which would become known as the turning point of the entire Civil War.  Not only was Custer present at General Robert Lee’s surrender at Appomattox Court House, but the table on which the surrender was signed was given to Custer as a gift for his wife with a note from General Sherdian praising Custer’s bravery and his key role in the Union victory.


Perhaps, though, some of Custer’s early successes gave him some false confidence as it related to future military engagements.   According to reports from The Battle of the Little Bighorn, General Custer reportedly said the following shortly before his death:


“Hurrah boys, we’ve got them! We’ll finish them up and then go home to our station.”


With the history lesson complete, reading the story of Custer and the Battle of the Little Bighorn made me think contextually about the stock market.  In essence, I can’t help but wonder after a +95% move in the SP500 from the lows of March 2009, whether this is The Last Stand of the Equity Bulls.  Certainly, both price action and recent data suggests we are at a critical juncture.  As well, and not dissimilar to Custer, there is likely an over confidence bias pervading the stock market due to the expedited two year move off the bottom. (LinkedIn anyone?)


Just like the cavalry, we’ve been sounding the warning trumpets of our key 2011 investment theme that Accelerating Inflation will lead to Slowing Growth.  No doubt, we’ve been early sounding the trumpet, but the view is now playing out in spades.


A key tell for this theme has been the price of copper, which is down just over -10% on the year.  Dr. Copper is perhaps one of the most predictive markets for gauging future economic growth, especially from China, a nation that consumers 40% of the world’s copper.  In the most recent data from China, refined copper imports into China were down in April by -48% year-over-year and -17% sequentially from March.  On the LME, copper inventories are up +34% from their December 2010 lows.


In other industrial metals, similar trends are in place.  Lead inventories are up +53% this year to the highest level since February 1995, aluminum stocks are at near record highs and up +11% for the year, and zinc inventories are up +21% in 2011 and reached a 16-year high on May 18th.   Other commodities are signaling the same via price action with lumber down -28% in price in the year-to-date, rubber down -7%, and coal down -6%.  In aggregate, the commodity complex is clearly telling us that global growth is slowing.


While the most recent quarter of corporate earnings in the United States was decent, results, broadly, were characterized by margin compression.   This was a call our Retail team, led by Sector Head Brian McGough, was early and right in calling.  The bell weather indicator of cost inflation this quarter was Gap Stores, who cut their full year earnings estimates from a range of $1.88 to $1.93 per share, to a range of $1.40 to $1.50 per share due to “heavy cost pressure”.  Collectively, the “cost issue” was reflected in the number of quarters that “beat” earnings this quarter.  Incidentally, beats were down to the lowest level since Q4 2008 at 59.5%.  


With a couple more quarters of FIFO accounting and tough commodity input compares ahead for the stock market, the valuation / earnings growth story becomes less compelling for equities, especially in the context of a slowing top line.  Globally, slowing growth is being driven by the emerging world fighting inflation, with the most recent evidence being Chinese PMI coming in at a 10-month low.  In Europe, slowing growth is and will continue to come from massive austerity measures that are being implemented to, hopefully, head off massive debt restructuring.  While in the U.S., the consumer is facing a serious retrenching with U.S. average weekly earnings on a negative trend, unemployment numbers breaking out to the upside, and home prices continuing to be in free fall.


Despite the likelihood that corporate margins continue to compress in the coming quarters, which will continue the trends of slowing earnings momentum, those bullish of U.S. equities argue that yields on fixed income are so low that equities still offer a compelling risk / reward.  On some level we agree, as we’ve already made the case for the Fed to remain Indefinitely Dovish and James Bullard, the President of the St. Louis Fed, signaled as much when he said in a speech last night, “past behavior of the FOMC indicates that the Committee sometimes puts policy on hold.”


Being on hold is of course one thing, but not extending Quantitative Easing is quite another.  It is the later point that we believe the The Last Stand of the Equity Bulls is predicated upon.  Unfortunately, given the fact that reported inflation in the U.S. is actually set to accelerate, it seems unlikely that the Fed will re-up on Quantitative Easing in the short term.


Hurrah, equity bulls! Hurrah!


Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


The Last Stand of the Equity Bulls - Chart of the Day


The Last Stand of the Equity Bulls - Virtual Portfolio

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The Macau Metro Monitor, May 24, 2011




Changi Airport handled 3.73MM passengers in April, a 13.7% increase compared to the same month in 2010. 


According to a person familiar with the matter, LVS approached banks for a $3.525 BN loan for its assets in Macau.  The five-year facility will pay interest and fees of 253bps+ LIBOR at the all-in level.  Proceeds will be used for refinancing.  VML U.S. Finance, a unit of the company, will borrow the funds while Venetian Macau Ltd. will guarantee the facility.

Being Early

This note was originally published at 8am on May 19, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“As always, if you listen to my advice, be prepared to be early!”

-Jeremy Grantham, May 2011


If you have not yet read Jeremy Grantham’s most recent GMO Quarterly Letter titled “Time To Be Serious (and probably too early) Once Again”, I highly recommend it. He’s been managing Global Macro risk for a long enough time to know that the best lessons in this business are learned the hard way.


Managing interconnected Global Macro risk is hard. So is keeping up with the required risk management reading that’s readily available to you. If you read too much groupthink, you’ll miss the deep simplicity of Mr. Macro Market’s signals. If you read too little history, you’ll miss the context by which the patterns of human behavior rhyme. Your reading needs to be focused and timely.


For me, it’s taken almost 13 years to realize that I read too much garbage and too little history. So, in the last 3 years I’ve worked on changing that. The plan on this front is always that the plan is going to change, but currently my reading process falls into two buckets:

  1. My pile
  2. My books

My pile, as my teammate of many years Tanya Waite can attest, is perpetually mounting. From my desk, to my bag, to airplane pockets around the world, my pile is my Princeton hockey player. I will fight it until I knock it down. My pile is a series of print outs (Grantham, Gross, etc.), white papers, and whatever else my team sends me that refutes or augments my current thinking.


My books, like my emotional baggage, are always with me – that’s why you’ll see me cite books in the sequence that I am reading them. I just finished reviewing “The Road To Serfdom” and “Undaunted Courage.” My challenge is to read at least 1 book every 10 days. On the plane to Denver last night, I was reading “The World In 2050” – more on that book and being long Northern Rim Countries (NORCs) in the coming weeks.


Back to Grantham’s problem of Being Early

  1. Being Early to work isn’t a problem – it’s cool
  2. Being Early to mentally prepare for a game is better than being late
  3. Being Early in our institutionalized world of chasing short-term performance is also called being wrong

That’s Wall Street. In evaluating our professional competence, our process and principles can always be trumped by our short-term P&L. Are you wrong today because you are about to be right? Or are you right today because you are about to blow up?


These are fair questions. Clients shouldn’t have to pay for my pile or performance problems. We are overpaid to over-deliver over long periods of time. As Risk Managers, we are tasked with explaining to our clients what it is that we are doing and why.


As Grantham points out in his Quarterly letter, “we often arrive at the winning post with good long-term results and less absolute volatility than most, but not necessarily with the same clients that we started out with.” Isn’t that the truth? Your clients need to know your duration too.


Back to the Global Macro Morning Grind…


No matter where you go this morning, there it is – The Correlation Risk to the US Dollar Index. For the week-to-date, the US Dollar Index is down a measly -0.65%, but look at the pop you are getting in the big stuff that’s priced in those Burning Bucks:

  1. CRB Commodities Index = +1.7% week-to-date
  2. WTI Crude Oil = +1.3% week-to-date
  3. SP500 = +0.22% week-to-date

Ok, maybe a 22 basis point move in US Equities isn’t the kind of pop that would get you all fired up, but maybe that’s the point. Maybe people are starting to get the math. Since the immediate-term inverse correlation between the SP500 and the USD is -0.84% (extremely high), maybe people are starting to consider the other side of the immediate-term TRADE.


What if the US Dollar stops going down from here?


The answer to that question is a trivial one. US stocks and commodities corrected -3% and -9%, respectively, in the last 2 weeks of a USD rally. While a strong dollar is great for this country, it’s awful for stock and commodity markets in the immediate-term. Yes, Mr. Bernanke, the country and the markets are 2 very different things.


This is where all of my reading runs parallel with my risk management signals – and yes, there is also a huge difference between the research embedded in your reading and how you manage risk in your portfolio. Every once in a while a risk management signal jumps out at me that’s impossible to ignore. Currently that signal is an immediate-term TRADE breakout in the US Dollar Index.


If you were only to allow me one live market quote to manage all Global Macro risk on for the next 3 weeks, I’d take the USD Index. The line in the sand is currently $74.41. That’s my TRADE line – and my risk management process is to respect it until correlation scores tell me not too.


If $74.41 holds support, I sell stocks and commodities (that’s why I have sold all my Oil and Gold in the last 2 weeks). If $74.41 breaks, I’ll be forced to go back to speculating on what The Inflation trade can do.


Being forced to do things isn’t cool. But, like Grantham, I have learned to take a measurable level of risk to speculate in these correlation trades. On page 2 of his Quarterly Letter, Part 2 – “Time To Be Serious” – May 2011, this is how the self-effacing Grantham summed up the same:


“As readers know, driven by my increasing dislike for being early by such substantial margins, I have been experimenting recently with going with the flow. In defense of this improper behavior, rest assured that it was motivated not by chasing momentum, but by my growing recognition of the immense power – sometimes the thoroughly dangerous power – of the Fed.”


Being Early doesn’t work until it does.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Being Early - Chart of the Day


Being Early - Virtual Portfolio




TODAY’S S&P 500 SET-UP - May 24, 2011


After seeing the SP500 get immediate-term TRADE oversold yesterday, we covered our short SPY position. This morning we’ll see another low-volume bounce in global equities - prepare to manage risk proactively into strength as this week is loaded with nasty US Housing catalysts.  As we look at today’s set up for the S&P 500, the range is 20 points or -0.18% downside to 1315 and 1.30% upside to 1335.









  • ADVANCE/DECLINE LINE: -1784 (-883)  
  • VOLUME: NYSE 866.82 (-12.65%)
  • VIX:  18.27 +4.82% YTD PERFORMANCE: +2.93%
  • SPX PUT/CALL RATIO: 2.13 from 2.08 (+2.40%)



  • TED SPREAD: 20.06
  • 3-MONTH T-BILL YIELD: 0.06% +0.01%
  • 10-Year: 3.13 from 3.15
  • YIELD CURVE: 2.58 from 2.60 



  • 8:25 a.m.: Fed’s Duke speaks on financial education in Boston
  • 9:50 a.m.: Fed’s Hoenig, Plosser speak in Phila.
  • 10 a.m.: New home sales, est. 300k (0.0%), prior 300k
  • 10 a.m.: Richmond Fed manufacturing index
  • 11:30 a.m.: U.S. to sell $28b 4-wk bills
  • 1 p.m.: U.S. to sell $35b 2-yr notes
  • 1:20 p.m: Fed’s Bullard speaks in Missouri
  • 4:30 p.m.: API inventories    


  • China appeals WTO ruling on car tires - Reuters
  • Moody's reviews ratings of selected UK financial institutions for possible downgrade
  • BP-Rosneft deal finished for the moment, says Russian Energy Minister Sergei Shmatko - WSJ
  • Weekly USDA crop report indicates 32% of winter wheat crop is in good or excellent condition; Compares to 32% last week and 66% in the same week last year.
  • Eurocontrol says it expects to cancel up to 500 more flights today - NYT 
  • At least 20,000 people have fled Sudan's Abyei region after northern army seized the area over the weekend, UN says 
  • China ratings agency Dagong cuts UK credit rating to A+ with neg outlook on "deteriorating debt repayment ability"







  • Goldman, Morgan Stanley Bullish on Commodities, Raise Oil Forecasts 20%
  • corn Production in China Climbing to Record Set to Limit Imports This Year
  • Oil Rises in New York After Biggest Loss in Week; Goldman Raises Forecast
  • Copper Advances as Goldman Sachs Advises Investors to Buy; Zinc Increases
  • Soybeans Gain as Demand for Commodities Used in Foods, Fuel May Strengthen
  • Sugar Climbs as EU May Allow More Duty-Free Imports; Coffee Prices Gain
  • Gold May Climb for Third Day as European Debt Crisis Buoys Haven Demand
  • Copper to Be Volatile, Will Not ‘Collapse,’ JPMorgan’s Schirmeister Says
  • India May Halt Potash Imports Without Price Accord, Farming Group Says
  • Feed-Grain Demand in South Korea May Decline 10% After Cattle, Hogs Culled
  • Palm Oil Advances as Soybeans Gain on Delays to Plantings in U.S. Midwest
  • Oil Supplies Sink in Survey as U.S. Floods Curtail Imports: Energy Markets
  • G8-Led Group Agrees to Biofuel Output Guidelines to Combat Global Warming







  • Germany leads region to another higher low on a decent IFO print; Sweden +0.6% (we bought it yesterday on the blowoff)
  • France May Business climate 107 vs consensus 109 and prior revised to 109 from 110
  • Germany Q1 final GDP +1.5% q/q and prior +1.5%; Germany Q1 final GDP +5.2% y/y and prior +5.2%
  • Greece will default if it does not get next EU/IFM bailout tranche -- Greece Financial Minister, as cited by Reuters





  • ASIA: wet Kleenex bounce for markets closing up with China down again, India down to -12.3% YTD and Vietnam collapsing (down -17.4% since May 4!)









Howard Penney

Managing Director

Early Look

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