TODAY’S S&P 500 SET-UP - June 13, 2011


Roll out the bearish on growth consensus – it’s career risk management time for the bulls and time to get the perma-bears back in the media (Roubini top story on Bloomberg this morn calling it the “Perfect Storm” – and Barrons Mid-Year Roundtable is actually funny when you read what their consensus was (side by side) 6 months ago).

Consensus, however, can remain a constant until its fully priced in:

  1. ASIAN EQUITIES: no bid this morning, with Japan down another -0.7% to -7.6% YTD on a nasty machinery order print (-3.3%)
  2. EUROPEAN EQUITIES: no bid as Greek stocks and bonds continue to crash (Athex Index down -27% since mid-Feb)
  3. COMMODITIES: no bid for Copper in particular (down -0.8% this morn) as base metals (nickel smoked) and silver (I guess that “industrial demand” component are seeing Growth Slowing getting priced in.


As we look at today’s set up for the S&P 500, the range is 43 points or -1.26% downside to 1255 and 2.13% upside to 1298.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -1920 (-2755)  
  • VOLUME: NYSE 1019.30 (+12.07%)
  • VIX:  18.86 +6.13% YTD PERFORMANCE: +6.25%
  • SPX PUT/CALL RATIO: 1.77 from 1.43 (+24.46%)



  • TED SPREAD: 21.29
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 2,99 from 3.01
  • YIELD CURVE: 2.58 from 2.58 



  • 9 a.m.: ECB’s Trichet speaks at London School of Economics
  • 9:30 a.m.: Fed’s Lacker speaks on manufacturing in Virginia
  • 11 a.m.: Export inspections, corn, wheat, soybeans
  • 11:30 a.m.: U.S. to sell $27b 3-mos. bills, $24b 6-mo. bills
  • 4 p.m.: Crop conditions
  • 7 p.m.: Fed’s Fisher speaks in Dallas 


  • Citi defends hacking disclosure delay - WSJ
  • US banks to cut Treasury use - FT
  • Best Buy may postpone its European expansion plans - FT



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Nickel Plunging Into Bear Market as Expanding Glut Outstrips Record Demand
  • Aluminum Bookings From LME’s Asian Warehouses Jump as U.S. Fees Hit Record
  • Oil Declines for a Second Day on Concern Over Economic Growth, Share Slump
  • Palm Oil Has Longest Losing Run in Two Years on Malaysian Supply Outlook
  • China’s Copper Imports ‘Low’ Last Month as Stockpiles Drop, Goldman Says
  • Wheat Rises as Rains May be Too Late to Prevent U.S., France Yield Losses
  • Rubber Drops to Two-Week Low as Chinese Demand May Ease on Slowing Economy
  • Funds Boost Bullish Agriculture Bets for Third Week as Crops May Decline
  • George Soros Urges G20 to Demand Mining Transparency, Le Figaro Reports
  • Tanzania Plans to Discuss Proposed Super Tax With Miners, Minister Says
  • Roubini Says a ‘Perfect Storm’ May Converge on the Global Economy in 2013




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: no bid; Greece continues to crash (down -27% since FEB hope highs); FTSE/DAX/CAC all breaking Hedgeye intermediate term TREND lines


THE HEDGEYE DAILY OUTLOOK - euro performance




  • A China banks issue CNY551.6B of new loans in May vs cons CNY650B - MarketWatch; M2 at end of May +15.1% y/y vs cons +15.5%.
  • ASIA: no bid; China makes new YTD lows and Japan down another -0.7% (were short) as rest of Asia breaks down (Taiwan -1.4%, Indonesia -1.0%)


THE HEDGEYE DAILY OUTLOOK - asia performance







Howard Penney

Managing Director

New Start

“If we are to build a better world, we must have the courage to make a new start.”

-F.A. Hayek


Last week I received a tremendous amount of positive feedback on my note titled “American Optimism.” So I’d like to start this week off by thanking you for inspiring me. I am very bullish on the prospects of building a better world – I am very bullish on change.


Interestingly, but not surprisingly, Hayek wrote the aforementioned quote in the concluding chapter of “The Road To Serfdom” (page 237) in 1944. His summary thought stood in the face of British-style Keynesianism that had dominated the economic theory of his time.


What was Keynes’ response to Hayek’s conclusions?


Bruce Caldwell (who edited the most recent edition of “The Road To Serfdom”) captures the moment best in his Introduction:


“John Maynard Keynes read the book on the way to the Bretton Woods conference, and delighted Hayek when he wrote him that it was “a grand book” and that “morally and philosophically I find myself in agreement with the whole of it; and not only in agreement with it, but in a deeply moved agreement.” (Letter, John Maynard Keyens to Hayek, June 28, 1944)


Alrighty then – we have a consensus!


Last week, the most bullish week-over-week moves in all of Global Macro came right where I think the prospects for change are going to be measured – in the real-time price of the US Dollar Index.


I’m not so concerned about US stocks being down for 6 consecutive weeks when it’s crystal clear that Growth Slows As Inflation Accelerates. What I need to see change (to get bullish on stocks) is a Deflating of The Inflation (Hedgeye Q2 Macro Theme).


With the US Dollar Index UP a full +2% last week to $75.60, here’s what happened to things priced in US Dollars:

  1. US Stocks = DOWN -2.3%
  2. WTI Crude Oil = DOWN -0.9%
  3. Copper = DOWN -1.4%

Le Mucker’s SERIES 66 TEST QUESTION: Which of those 3 things matters most to the US Economy?

  1. La Bernank says stocks
  2. Le Consumer says gas prices
  3. Le Industrialist says cost pressures

I’ll go with #2 and #3.


If you want a New Start in this country you have to see a Deflating of The Inflation. Otherwise you’ll continue to see a slowdown in 70% of US GDP (Consumption) and margin compression at the companies who are supposed to employ these consumers.


The Stagflation is not hard to understand (Growth Slowing below the rate of Inflation). It just isn’t palatable for the Keynesian Kingdom to accept responsibility for it. That would be called holding themselves accountable.


Until I start seeing data that implies that both of these things are occurring at the same time:

  1. Growth is slowing at a decelerating rate
  2. Inflation is accelerating at a decelerating rate

Why would I stop protecting my family’s hard-earned wealth?


Being in Cash in 2011 has obviously beaten 48 of the country stock markets in the Hedgeye Global Macro Stock Market Index for the YTD (there are 66 country indices in our Index). And, depending on where you bought them (or what index you are in – both the Nasdaq and Russell 2000 are DOWN for 2011 YTD), the +1% YTD return in the SP500 has been slim pickings!


Here’s how the Hedgeye Asset Allocation Model was positioned going into and out of Friday’s US equity market swoon:

  1. Cash = 52% (UP +3% week-over-week after selling ½ our US Equity Allocation on mid-week strength)
  2. International Currencies = 21% (Chinese Yuan and US Dollar – CYB and UUP)
  3. Fixed Income = 18% (Long-term UST Bonds and US Treasury Flattener – TLT and FLAT)
  4. Commodities = 3% (Gold – GLD)
  5. US Equities = 3% (US Healthcare – XLV)
  6. International Equities = 3% (Germany – EWG)

And no, being in 52% Cash wasn’t enough!


On a week-over-week basis, I lost money in 4 of 6 of these asset allocation positions:

  1. US Dollar (UUP) = +1.5%
  2. Long-term Treasuries (TLT) = +0.8%
  3. Chinese Yuan (CYB) = -0.4%
  4. Gold (GLD) = -0.7%
  5. Healthcare (XLV) = -1.1%
  6. Germany (EWG) = -2.7%

It’s a good thing I have shorts – and there’s plenty to be optimistic about on that front. There’s always risk to be managed somewhere.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $98.60-100.45, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


New Start - Chart of the Day


New Start - Virtual Portfolio

The Week Ahead

The Economic Data calendar for the week of the 13th of June through the 17th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - ca1

The Week Ahead - ca2

Gravity Weighs on Korea

Conclusion: We see more selling pressure in the Kospi’s intermediate-term future, as the balance of earnings risk is skewed to the downside alongside the gravitational pull of mean reversion. Furthermore, the Bank of Korea will likely be more hawkish than is currently anticipated by consensus.


Today, the market didn’t like the Bank of Korea’s vigilance regarding its “war on inflation” (as proclaimed by president Lee Myung Bak in January). The latest +25bps move is the third rate hike YTD and brings the country’s real benchmark interest rate to -0.85%. While the recent slope of real rates is a noteworthy positive, we can’t help but callout the fact that Korean real rates (adjusted for inflation) have been in negative territory since November ’09. And while negative real rates have indeed been stimulative to Korean economic growth over the past couple of years, we can’t help but callout their negative impact on the future slope of growth in Korea – also negative.


Gravity Weighs on Korea - 1


Both Korea’s equity and bond market agree with our stance; the Kospi Index is now broken on an immediate-term TRADE and intermediate-term TREND perspective and Korea’s sovereign bond 10Y-2Y spread has narrowed -49bps YTD:


Gravity Weighs on Korea - 2


Gravity Weighs on Korea - 3


It seems that Global Macro is akin to real life in the sense that one cannot get something for nothing. What we mean by this is that Korea’s loose monetary policy has been bullish for domestic inflation readings and we expect Korea’s CPI to continue to accelerate on a YoY basis over the next 3-6 months – particularly its core inflation index. This will force the Bank of Korea to continue to tighten monetary policy – a direct blow to economic growth in the ~70% consumption-based economy (~55% Household; ~15% Government). Moreover, higher interest rates will weigh on private consumption going forward as servicing costs for an all-time high household debt burden of 801.4 trillion won ($740 billion; equivalent to 155.4% of disposable income) creep up.


Our view that the Bank of Korea will continue to remain hawkish over the intermediate term is divergent with current consensus expectations of only one more rate hike in 2011 to 3.5% (Bloomberg). We like being contrarian here, as the Bank of Korea has recently signaled that they’re on our side of the fence insomuch that they will look past slowing growth to continue on its path of interest rate normalization:


“The committee will conduct monetary policy with a greater emphasis on ensuring that the basis for price stability is firmly anchored while the economy continues its sound growth… Despite the temporary sluggishness of domestic demand, the economy has maintained its underlying upward trend.”

-Bank of Korea Governor Kim Choong Soo; June 10, 2011


Soo also said on May 18th that the Bank of Korea will continue to boost borrowing costs at its own pace and that the nation needs to be wary of an inflation spiral.


“Inflation spiral” and “sluggishness of domestic demand” isn’t exactly what investors in Korean equities want to be hearing out of the Korean central bank chief following a 26-month doubling of the Kospi Index. While the former is much less probable at the current juncture, that doesn’t change the fact that the latter is a real and present danger to Korean corporate earnings. As such, we see more selling pressure in the Kospi’s intermediate-term future. While Korea has been a darling over the last year (up +23.9% YoY), the balance of earnings risk is skewed to the downside alongside the gravitational pull of mean reversion.


Darius Dale



In short, David Overton’s philosophy on pricing is to take it – whether you need it or not.


Specifically, yesterday he said “We found that if we just keep going up a little bit all the time, whether you need it or not, when times like this come (read significant food inflation), you're not behind the eight ball. And you don't have to have a 3% or 4% price increase.”  So, in short, the company does not think a price hike 1%-1.5% will impact consumer behavior in today’s uncertain environment.  While I can see his point, the concept must maintain its relative value over time.


What about the cumulative effects of price hikes?  The chart below shows just how much pricing cake has taken since 2007, on a consistent basis, and we overlaid the implied traffic/mix trends implied by the reported same-stores sales trends.  Looking at the chart, it’s clear that traffic/mix has declined over the past three years.  Particularly during the latter part of 2008 and in 2009, when food costs were down year-over-year and economic woes elevated the importance of relative value, CAKE experiences a precipitous decline in traffic/mix.  Clearly, we cannot conclude that that was caused entirely by the price increase but it is possible that these persistent increases – when they are not “needed” – are hurting the traffic/mix trends.  The recurring average check problem that has hampered CAKE’s top-line is a direct message from the consumer that the continuous increases in price can take the price-point to a beyond what they are willing to pay.


The history of the Cheesecake Factory is quintessentially American, it is a great concept and – on a personal level – I’m looking forward the opening of the company’s new store in the Short Hills Mall, right in my back yard.  An important component of the bull case for the stock is the ability of the company to improve average unit volumes through increased customer counts.  Currently, CAKE is producing average unit volumes of ~$9.7 million versus $11 million a few years back.


Clearly the Great Recession has impacted the concepts guest counts, but to what degree will the company be able to win back lapsed users and potential increase frequency from the core customer base?  More importantly, when are they going to visit the store?  One sign of the health of the concept is the fact that the restaurant is busy during peak meal times and generally operates with customers waiting to be seated.  In the past, CAKE has never been a “comp story” for just that reason; it’s very difficult to push more people through the peak meal periods.  Management is focusing on “shoulder” periods in an effort through get more people through the door.  Happy hour was a factor in the recent improvement in guest traffic.


What are the long-term implications of management’s pricing philosophy and the ability to attract new consumers?  Will they only come in for the latest deal at “happy hour”, or the small plates menu, which implies that the consumer likes the concept – just at a lower price?


In the current environment, with pump prices still high, many commodities and food prices still rising, and the unemployment picture still uninspiring, economic sentiment remains stagnant and consumer spending and confidence is challenged.  The debate about menu pricing and the ongoing impact on consumer behavior will continue for some time. 


CAKE - MANAGING ATTRITION - cake price traffic mix 07



Howard Penney

Managing Director

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.