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American Optimism

This note was originally published at 8am on June 10, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“He had shown himself to be … a young man who took great pride in his perseverance and steadiness of purpose.”

-Stephen Ambrose


A month or so ago I referenced researching more about the roots of Jeffersonian thought (an alternative to British Keynesianism). Being a Canadian who is constantly thirsting to be educated in American history, I often lean on my American-born colleagues for reading recommendations.


One of our analysts, Allison Kaptur, pointed me towards Stephen Ambrose’s “Undaunted Courage” – the story of Meriwether Lewis, Thomas Jefferson, and the Opening of the American West. It was easily one of the most gripping and inspirational stories I have ever read.


The way the best storytelling is told is when the author personalizes the experience and reaches in and grabs you. Many of you will be familiar with the late Stephen Ambrose for his work in “Band of Brothers.” Many of you may not be familiar with the passion Ambrose had for backpacking every step of the Lewis & Clark Trail with his family.


“Of courage undaunted” was the opening description of Thomas Jefferson’s praise for Meriwether Lewis. It’s where Ambrose’s wife, Alice, came up with the idea for the title of the book. As Ambrose acknowledges best in answering the question, “what is the secret to being a successful author?” – “Marry an English major.”


Lewis never married. He died, tragically, at the very young age of 35 years old in Hohenwald, Tennessee, shortly after being appointed by Jefferson as the Governor of Louisiana in 1806. While it would be easy to tell stories about how messed up Meriwether’s mind became in his final years, I think it’s best for Americans to celebrate the confidence and courage it took for him to change the world.


“At eighteen years old, he was on his own. He had travelled extensively across the southern part of the Unites States. He had shown himself to be a self-reliant, self contained, self confident teenager…” (Ambrose, “Undaunted Courage”, page 29)


After 6 consecutive down weeks for US stocks, I’m calling attention to this story after being inspired by a great American Olympian who I have the pleasure and privilege of working alongside at Hedgeye – Bob Brooke.


On Wednesday night, Bob, Big Alberta, Darius Dale, Kevin Kaiser, and I were having a few beverages watching Game 4 of the Stanley Cup Playoffs with our summer interns. After proudly attending his son’s graduation at a very patriotic ceremony at Notre Dame, Bob told me it was a good time to think about a way to communicate to our clients how optimistic we are about the future.


You see, Wall Street and Washington like to put people like us in boxes. When you’re always thinking inside of the box – I guess that makes sense. You’re either a Bull or a Bear, a Democrat or a Republican – and it’s easier for these group-thinkers to generalize and not take the time to understand what something new could mean.


Just because I am bearish on US Equities, old Wall Street, and Keynesian Central Planning in Washington, doesn’t mean I don’t have the confidence and courage to put my own capital at risk to build a great team in this great country.


In fact, it’s quite the opposite – everything I am pessimistic about, gives birth to my optimism.


At the Hedgeye Holiday Party this past December, I cited a very popular American country song titled “Bless the Broken Road” (recent rendition by Rascal Flatts) to better explain why it’s our industry itself that gives me reason for optimism:


Every long lost dream led me to where you are
Others who broke my heart they were like Northern stars
Pointing me on my way into your loving arms
This much I know is true
That God blessed the broken road
That led me straight to you


Without giving away Hedgeye’s strategy to continue to be the change we want to see in this profession, that’s all I have to say about that. If Wall Street and Washington don’t realize that the most simple solution to all of this is to stop what they are doing, then the rest of us will just have to keep plugging away until we’ve reached the new open frontier of American Optimism that’s as old as America itself.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1531-1548, $98.46-102.91, and 1261-1304, respectively.


God Bless America,



Keith R. McCullough
Chief Executive Officer


American Optimism - Chart of the Day


American Optimism - Virtual Portfolio


Yesterday’s May retail sales data was bullish for the restaurant industry.  Food Service and Drinking Places posted healthy sales growth M/M of 0.6% versus the -0.8% decline in April.  Overall, sales in May fell (ex-auto sales were up) with weakness was broad based.


The National Restaurant Association projects that 50 million adults will dine at a restaurant to celebrate Father’s Day this Sunday, June 19. 



  • KKD, SONC, COSI and WEN all up on accelerating volume; all of the QSR stocks we monitor were up on the day
  • PNRA is investing $40 million in its first major television campaign that is deliberately understated in the way it portrays the fast-growing bakery-café brand.
  • DPZ announced its Domino’s App for iPhone and iPod touch is now available on the App Store. The app gives users the ability to order from Domino’s with just a few taps of the screen.


  • CBRL, RT and CHUX up on accelerating volume!  CBRL and RT are both being pursued by activist investors
  • KONA and RUTH down on accelerating volume




Howard Penney

Managing Director

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


“True, atomic bombs have made nuclear war so catastrophic that I am convinced no country wishes to resort to it.  But I am equally convinced that we are at the mercy of an error of judgment or a technical breakdown, the source of which no man may ever know.”

-Jean Monnet


Jean Monnet is regarded by many as the chief architect of European integration.  Following the World Wars, there was much support for political movement that would lessen the probability of the horrors and injustices that ravaged Europe for so much of the first half of the Twentieth Century being repeated.  Indeed, a plaque in Washington D.C. on the front of the Willard Hotel memorializes Monnet as a man that died as a “proud citizen of the Europe he inspired and helped to create”.


The period immediately following World War II was clearly anomalous in many respects.  For one, there was broad consensus on the need for closer European integration which, it was claimed, was the only way to defeat the ugly beast of Nationalism that had marred so much of the continent’s past.  Every viewpoint must be understood in the context of the environment in which it is adopted.  Winston Churchill, possibly the most proud of all Englishmen, was firmly in favor of European integration.  In a speech at Zurich University, that came to be known as “The Tragedy of Europe”, Churchill stated plainly, “We must build a kind of United States of Europe”.  His conviction in this matter was clearly derived from his experiences of war-time Europe, speaking as he was in September of 1946.  Interestingly, while his use of “we” implies British participation in the process, he excluded Britain from his description of the proposed “United States of Europe”. 


Given that a key initial component of the European project, as proposed by the Schuman Declaration, was to be the pooling of coal and steel production, it is astonishing to think just how economically and financially integrated the present day European Union is.  Merely fifty-five years later, the labyrinthine European financial system has become so complex and interconnected that understanding the implications of policy changes or – indeed – the limits of national autonomy within Europe, has become exceedingly difficult.


Indeed, Matt Hedrick, Hedgeye’s cerebral Europe Strategist, has recently been analyzing the nuances of the European banking system of late.  The guidelines by which European money is created is quite opaque, with many standards relating to banking practices within the European Monetary Union seemingly in a constant state of flux.  For example, Matt has pointed out recently, in dialogue about Greece with a Hedgeye client, that National Central Banks can decide what collateral to accept from commercial banks based on ECB guidelines.  However, recent concessions mean that government debt and bank assets rated near or at junk are acceptable in some cases.  In addition, the recent downgrading of Greece to a credit rating of CCC from B by Standard & Poor’s is drawing attention to the country’s ability, or lack thereof, to meet future obligations.  There are innumerous potentially unexpected consequences that could arise from the current system.  


It has been astonishing to hear market commentators dismiss the risk Greece poses to the broader European and global financial markets.  Some television pundits have asserted that “Greece doesn’t matter”.  Clearly, given the interconnected nature of risk within the European financial system and the fact that the Bundesbank has the most exposure of any European bank to the peripheral countries, Greece absolutely matters.  The determination of European leaders such as Jean-Claude Trichet to assuage any and all fears of contagion within Europe – be they emanating from Greece, Ireland or elsewhere – speaks to this fact. 


Of course, European leaders have been forced to choose their words increasingly carefully since, essentially, the outset of the European sovereign debt crisis began attracting attention in 2010.  For instance, the viability of the single European currency has been called into question for some time.  As Hyman Minksy writes in “Stabilizing an Unstable Economy”, “Money arises not only in the process of financing, but an economy has a number of different types of money: everyone can create money; the problem is to get it accepted”.  This point highlights a crucial role that the European Union is assuming on a broader sense: assuming that the currency – and means by which it is created – continues to be accepted.  This logic can be extended to other facets of the European Union.  It is not only crucial that the common currency continues to be accepted by the people, but also that the common monetary policy, laws, policies and frameworks continue to be accepted also.  As social unrest intensifies in Europe, it becomes more and more challenging to bind a continent together which, for so much of its history, has been defined by factionalism.


The “Greece doesn’t matter” attitude is typical of U.S. centric investors that, time and again, commit the sin of neglecting to realize the interconnected nature of global macroeconomic risk.  It is acutely ironic that it may just be the highly integrated nature of Europe that breeds disagreement in the 21st Century after Monnet, Schuman, and so many others saw integration as key to securing the future prosperity of Europe’s people.  As recently as 2005, this view was held firmly.  Whether in Celtic Tiger Ireland or the booming Costa del Sol in Spain, European integration was credited as a key driver of prosperity.  Many in the peripheral countries now blame a lack of monetary autonomy for sluggish growth.


What’s voted by the market as “good” today can be “bad” tomorrow.  That can be correlation risk, interest rate risk, geopolitical risk or any other condition or accepted truism.  Investors that dismiss this reality are repeating the mistakes of the recent past, just as we believe that policy makers in Washington are repeating mistakes made in the 1970’s that led to Jobless Stagflation.  If an unfortunate turn of events did take place in Europe – George Soros recently stated his belief that the risk of this is mounting – the traditional response will take over the airwaves: “it was unforeseeable”.  What is foreseeable about markets is that they are unpredictable, especially in Europe which has seen so much turmoil and conflict throughout its modern history.  From a shorter-term perspective, price is telling us all we need to know as equity markets slump and CDS spreads continue to widen.  While the U.S. has no shortage of its own internal problems, we know from very recent history that the global markets are closely interconnected.


Indeed, as Churchill said in “The Tragedy of Europe”, “Is it the only lesson of history that mankind is unteachable?”


Rory Green







TODAY’S S&P 500 SET-UP - June 15, 2011


What's interesting about yesterday’s low-volume rally to lower-highs is that neither the volume nor the volatility signals confirmed anything but the same.  The Hedgeye S&P 500 Sector Risk Management Model continues to flash bullish on 0 of 9 Sectors.  As we look at today’s set up for the S&P 500, the range is 49 points or -2.01% downside to 1261 and 1.80% upside to 1311.




THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: +1919 (+2463)  
  • VOLUME: NYSE 915.34 (+0.78%)
  • VIX:  18.26 -6.88% YTD PERFORMANCE: +2.87%
  • SPX PUT/CALL RATIO: 1.50 from 1.67 (-6.13%)



  • TED SPREAD: 19.95
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 3.11 from 3.00
  • YIELD CURVE: 2.66 from 2.60 



  • 7 a.m.: MBA Mortgage Applications, prior 0.4%
  • 8:30 a.m.: CPI, est. 0.1%, prior 0.4%
  • 8:30 a.m.: Empire Manufacturing, est. 12.00, prior 11.88
  • 9 a.m.: Total Net TIC Flows, prior $116.0b
  • 9:15 a.m.: Industrial production, est. 0.2%, prior 0.0%
  • 9:15 a.m.: Capacity utilization, est. 77.0%, prior 76.9%
  • 10 a.m.: NAHB Housing Market: est. 16, prior 16
  • 10:30 a.m.: DoE inventories


  • Euro-area finance chiefs emergency session fails to break deadlock on how to enroll investors in second Greek bailout
  • Bullish sentiment decreases to 37.0% from 40.9% in the latest US Investor's Intelligence poll; Bearish sentiment increases to 26.0% from 22.6% - those expecting a market correction increases to 37.0% from 36.5%
  • Federal Reserve deciding whether to set explicit inflation targets - Bloomberg
  • Consumers ditching cable for satellite, phone companies - LA Times
  • Conneticut AG asks Citi for data on its security after hacking attack - FT







  • Oil Declines as Concerns Over European Debt Counter U.S. Inventory Drop
  • Copper Falls in London Before Industrial Production Reports: LME Preview
  • Gold to Extend Gains as Buyers Seek ‘Safety’ Against Inflation, Fund Says
  • Wheat Harvest Forecast Increased by Australia as Rains Boost Crop Outlook
  • Natural Gas Production at Record as Shale Puzzle Solved: Energy Markets
  • Copper Users in China Plunder Stockpiles as Goldman Forecasts Record Rally
  • Canadian National Beating Canadian Pacific With Investors: Freight Markets
  • Gold May Slide as Strengthening Dollar Saps Alternative Investment Demand
  • Cotton Shortage in China May Worsen on Lack of Land, Increasing Imports
  • Cocoa Arrivals From Brazil’s Bahia Decline by 5.3%, Analyst Hartmann Says
  • Rio’s Hu May Get Chance to Exit China With Australia Plan for Jail Treaty
  • Rubber in Tokyo Climbs for First Day in Six as Oil Price, Yen Boost Appeal
  • European Commodity Day Ahead: Copper May Rally as China Stockpiles Plummet








  • EUROPE: no follow through across European stocks; Greece crashing again, down another -1.5%; Spain down -0.7%; Italy -1% - tick tock
  • Euro-area finance chiefs emergency session fails to break deadlock on how to enroll investors in second Greek bailout






  • ASIA: no follow through to Chinese short covering-China down -0.9% and were long it yet; HK down another -.7%; India down -.9% to -11.5% YTD 










Howard Penney

Managing Director

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