TODAY’S S&P 500 SET-UP - July 21, 2011


Watch the media focus on Greece while everything other than Greece is what's starting to have market impact (the #1 Bloomberg headline is one of these hope things "Merkel/Sarkozy to Outline Position on Greek Debt."  As we look at today’s set up for the S&P 500, the range is 22 points or -0.52% downside to 1319 and 1.14% upside to 1341.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: +337 (-1412)  
  • VOLUME: NYSE 796.28 (-8.541%)
  • VIX:  19.09 -0.62% YTD PERFORMANCE: -7.55%
  • SPX PUT/CALL RATIO: 1.98 from 1.63 (+21.57%)



  • TED SPREAD: 23.27
  • 3-MONTH T-BILL YIELD: 0.02% -0.01%
  • 10-Year: 2.96 from 2.91
  • YIELD CURVE: 2.57 from 2.57



  • 8:30 a.m.: Jobless Claims, est. 410k, prior 405k
  • 8:30 a.m.: Fed’s Evans speaks to reporters in Chicago
  • 9:45 a.m.: Bloomberg Consumer Comfort, prior -43.9
  • 10 a.m.: Fed’s Bernanke testifies on Dodd-Frank anniversary
  • 10 a.m.: FHFA Home Price Index, est. 0.1%, prior 0.8%
  • 10 a.m.: Leading indicators, est. 0.2%, prior 0.8%
  • 10 a.m.: Philadelphia Fed, est. 2.0, prior -7.7
  • 10:30 a.m.: EIA Natural Gas
  • 1 p.m.: U.S. to sell $13b 10-yr TIPS


  • German Chancellor Merkel, French President Sarkozy will outline a joint position to solve Greece’s debt crisis at European leader summit
  • Express Scripts to Buy Medco for $29 Billion: WSJ
  • Senate Banking Committee hears from Fed Chairman Ben Bernanke, SEC Chairwoman Mary Schapiro, CFTC Chairman Gary Gensler and Deputy Treasury Secretary Neal Wolin on the Dodd-Frank law after one year. 10 a.m.



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Oil Declines From Near Highest in Week on Chinese Manufacturing, Dollar
  • Copper Falls for Second Day as Manufacturing May Shrink in Top User China
  • Gold May Drop From Near-Record Price After Franco-German Accord on Greece
  • Soybeans Advance for Second Day on Increased Optimism Over China’s Imports
  • Cocoa Falls for a Third Day on Signs of Ample Supplies; Sugar Prices Gain
  • Paris Wheat May Climb 5.4% on Fibonacci, Agritel Says: Technical Analysis
  • Palm Oil Drops After Rally to Four-Week High as Output Boosts Stockpiles
  • Soybean Crop in India Seen at Record for Second Year as Rains Spur Sowing
  • China June Refined Copper Imports Increase for the First Month in Three
  • Gold May Rally to $1,800 as Newedge Forecasts Stronger Haven, Asian Demand
  • Billionaire Chandler Lifts Sino-Forest Stake as Block Prompts Paulson Exit
  • Inflation Tough to Digest for Asia as Food Costs Soar From Pork to Onions
  • Brent Contango Fades as IEA Is Seen Ending Sales of Crude: Energy Markets



THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: oncoming train wreck now that Germany is slowing; Spain/Italy broken; FTSE breaking TREND line of 5921 too; Turkey down -3.1% here?
  • GERMANY - one of my favorite countries and markets (stocks and bonds) for the last 2 years, but the economic data is slowing - period. This morning's German Manufacturing PMI print was a big slowdown to 52.1 vs consensus 54.0,prior 54.6; Services 52.9 vs consensus 56.0, prior 56.7; the DAX is breaking my TREND line (7198).
  • SPAIN - previews to a not so friendly kiss are these July sovereign debt auctions - the big wet smooches are coming in AUG/SEP and I still don't think consensus gets that.  The manic media are so focused on what some European government person will say out of lunch in Brussels

UK Jun retail July preliminary PMI

  • France - Manufacturing 50.1 vs consensus 52.0, prior 52.5; Services 54.2 vs consensus 55.5, prior 56.1
  • EuroZone - Manufactruing 50.4 vs consensus 51.5, prior 52.0; Services 51.4 vs consensus 53.0, prior 53.7


THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: just not a good week for Asian stocks; China down for the last 4 days and India down 3 of the last 4; KOSPI testing TREND line support on
  • CHINA - another ugly PMI print at 48.9 vs 50.1 in July; Chinese stocks led Asia lower last night, down -1% on the news; we may like China from a price - but we don't like this data; neither did Dr Copper trading down -1.1% this morning
  • Japan June trade balance ¥70.7B vs cons (¥148.6B).
  • Japan June supermarket comps (0.7%) y/y

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

Cash Conviction

This note was originally published at 8am on July 18, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“To hold cash you have to have a conviction that prices of something that you’d otherwise own will go down.”

-Jeff Gundlach, July 2011


That was an excellent quote from an excellent Risk Manager in a Bloomberg interview this morning. Jeff Gundlach is nobody’s yes-man. He has conviction in his research and risk management views and he understands there is a difference between the two.


He also understands how to use Cash as a risk management weapon. Currently, according to the article (“Gundlach Leads Bond Funds Boosting Cash to Most Since 2008 in Bullish Bet”), the CEO and Founder of DoubleLine Capital is running with 5x the amount of Cash he usually does. I like that. Today, Cash is king.


Since the beginning of 2011, one of the best ideas in the Hedgeye Asset Allocation Model has been Cash. We’ve held the most variant view (versus sell-side consensus) about US GDP Growth being slower than expected for the last 8 months. So why be fully invested in Global Equities when you have conviction that growth expectations need to come down?


Here’s the Hedgeye Asset Allocation Model as of Friday’s market close:

  1. CASH = 46% (down from 49% last week)
  2. FIXED INCOME = 21% (Long-term US Treasuries and US Treasury Flattener – TLT and FLAT)
  3. INTERNATIONAL EQUITIES = 15% (China, Germany, and S&P Int’l Dividend – CAF, EWG, and DWX)
  4. FOREIGN CURRENCY = 12% (Canadian and US Dollars – FXC and UUP)
  5. US EQUITIES = 6% (Healthcare – XLV)

Now some people say they are bearish on US Growth. But are they Bearish Enough? Or, in the case of China, were they Too Bearish? The answers to these questions will be on the tape by the time 2011 is all said and done.


So let’s take some time to knock down the risk management pins, and look at my Global Macro positions in the aforementioned order:

  1. CASH– the art of risk management is not losing money when everyone else does. This position is not going to hurt me or my family (that’s how I look at asset allocation, because I can – my hard earned net worth doesn’t have a fully invested mandate).
  2. TLT – if people aren’t Bearish Enough on US Growth and they are too hawked up on inflation, they really need to be honest with themselves and re-allocate to long-term UST bonds. My immediate-term downside targets in 10 and 30 year US Treasury Yields are 2.82% and 4.11%, respectively. We have been bullish on the long-end of the UST Bond market since April 2011.
  3. FLAT – I still think an obvious way that both the market and investors can express a bearish view on US economic growth is through compression in the Yield Curve. When La Bernank went to QE1, the 10s/2s Spread peaked at 293bps wide. This morning it’s at 253bps wide. All I need for further compression is 2-year yields arresting their decline at the gravitational support level of zero.
  4. CAF – Chinese stocks have beaten US stocks by a 2-bagger since the June lows. Last night China closed down a small -0.12% for the Shanghai Composite’s first down day in the last 4. With Global Growth Slowing, I think you pay more for the growth that you can find.
  5. EWG – Germany is the long position that makes me most nervous. Why? Spend 3 minutes listening to a Eurocrat talk about how well they understand the interconnected global macro risk associated with Italy and Spain (we’re short Italy – EWI). We are long Germany because we like its fiscal and growth positions on a relative basis to almost everyone other than China (of the majors).
  6. DWX – International Dividend Yield of almost 6% here and guess what? As European stocks go lower, that yield goes higher! Chasing yield doesn’t work unless you buy it right. I have been early here (also referred to as being wrong), but have patience and time.
  7. FXC – Loonies were one of the best performing currencies in the world last week. We like safe resources. The Canadian Dollar is in a Bullish Formation (bullish TRADE, TREND, and TAIL) – and, yes, I am Canadian.
  8.  UUP – We walked through why we are bullish on the US Dollar and bearish on the Euro in our Q3 Macro Themes Call on Friday (email if you want the replay/slides). The policy/currency scenario analysis is always complex, but the conclusion needs to be simple and heavily weighted towards timing/catalysts.
  9. XLV – Healthcare has been the top performing Sector in our 9 Sector S&P Risk Management Model for the last 3 months. We aren’t Johnny Come Latelys here either. At the beginning of 2011, we called Healthcare (XLV) and Energy (XLE) as our 2 favorites. Healthcare remains in a Bullish Formation (bullish TRADE, TREND, and TAIL) at +11.7% YTD.

Commodities at ZERO percent was really wrong last week on one position – Gold. After shorting Gold in December 2010 and covering the short position in January 2011, we’ve been long Gold (GLD) for the better part of 2011, but there are no buts – we aren’t long it here and missed a huge move last week (+3.1% week-over-week) to new all-time highs.


There is nothing inconsistent with the long Gold research and the rest of my positions other than not being long Gold itself. The Gold price is not only repudiating Keynesian Economics, but it continues to prove that it outperforms, big time, when the yield on real-interest rates is negative. Gold bulls can thank the Fiat Fools for that.


Three other week-over-week moves to think about while these central planners of the world attempt to unite one more time this week in Brussels and Washington:

  1. Euro/USD = DOWN -0.7% last week = bearish intermediate-term TREND (resistance $1.43)
  2. Small Cap US stocks (Russell 2000) = DOWN -2.8% last week = liquidity risk
  3. Volatility (VIX) = UP +22.2% to 19.53 last week = positively correlated to the US Dollar

All the while, Fiat Fool in Chief of the Europig nations, Jean-Claude Trichet, woke the world up to an epiphany in the FT Deutschland this morning: “Naturally the Europeans can manage the issue.”


Naturally, we’ll take the other side of that.


My immediate-term TRADE ranges for Gold, Oil, and the SP500 are now $1554-1608, $95.82-98.99, and 1297-1319, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


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Tipping Points

“There is an invisible tipping point. When we get there, it’s far too late.”

-Seth Klarman


I’ve used this quote from Baupost Group Chief, Seth Klarman, before. When he said it, he was alluding to America. In Europe, I think we’re there.  Some Tipping Points are invisible to many, but crystal clear to Mr. Macro Market. You just have to be humble enough to let him show you the way.


For all of you who got this right in 2008, you know exactly what I am talking about. The interconnectedness of Global Macro markets has been clear to you for quite some time now. Considering your portfolio risk from the narrow vantage point of one country and its credit risk is as obsolete as Keynesian Economics.


This systemic problem in our industry’s analytics was born in academia and now it thrives in government. These central planners of the world unite and focus on “risks” after they have been priced in. In doing so, they are blinded by what’s coming next.


Consider the #1 headline on Bloomberg this morning:




Gee, thanks.


Meanwhile, as these left leaning Europeans prepare for their 3 hour lunch in Brussels, the rest of the world’s interconnected risk continues to be priced on a tick.


From a Chaos Theorists perspective (an alternative to Keynesian dogma), the deepest simplicity that I can achieve in explaining how this works is watching every grain of sand (market data points - including Price, Volume, and Volatility signals) fall onto my screens – one by one. Unless you have a process to contextualize Tipping Points, how will you know which grain of sand will collapse the pile?


Hedgeye doesn’t have its feet on the floor earlier than any other firm we compete with for bailouts and giggles. We do it because someone needs to be awake every morning, watching the grains of sand.


This morning’s moves in Global Macro are a critical example of what I am ultimately trying to signal – timing:

  1. Intel (US equity market barometer) flags that margins are peaking last night at the close = US FUTURES DOWN
  2. China comes out with a brutal manufacturing PMI print of 48.8 in July (versus 50.1 in June) = ASIA DOWN
  3. Germany then hits the tape with an equally bad PMI print (versus expectations as China’s) = DAX DOWN

There’s obviously a lot of other things going on out there, but the principles of Chaos or Complexity Theory hinge on simplifying what factors have the largest impacts to the ecosystem you are analyzing. US Tech, China, and Germany are large factors.


There’s a difference between correlation and causality. The fundamental slowing of economic growth, globally, is causal to markets and the companies that operate within them. Whereas measuring the correlation between these Global Macro data points and market prices is trivial – if you have a process to absorb them:

  1. US Equities are going to re-test intermediate-term TREND line support (1319 SP500) this morning
  2. Chinese Equities had their biggest down day in 3 weeks, closing down -1% at 2765 on the Shanghai Composite
  3. German Equities are breaking their intermediate-term TREND line of 7198 on the DAX

What do any of these things have to do with Greece?


Exactly. Nothing. Greece is gone. Caput. Gonzo. Au-revoir.


Greek equities have crashed, twice, in the last 2 years and the Greek bond market is illiquid and dark. Europig politicians are not going to be able to do a damn thing to save Greece from themselves. Default and/or restructuring is the only way out.


So they may as well move to the crème brule in Brussels today and focus on what really matters to both the EU and the Euro – Germany’s economic slowdown and Spain/Italy bumping up against massive debt maturities in August and September (it’s July). Focusing on Greece today is far too late.


My immediate-term support and resistance ranges for Gold (we’re long), Oil (no position), and the SP500 are now $1, $95.47-99.08, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Tipping Points - Chart of the Day


Tipping Points - Virtual Portfolio


BJRI is one of the casual dining names that defies gravity in the current environment, although the skeptics abound with 64.7% of sell-side ratings calling the stock a “Hold” and 5.9% rating it “Sell”.  Buy-side sentiment became less bearish throughout the quarter, declining from 19% of the float to 16%.


BJRI - HUMMING ALONG - bjri buy side sentiment


BJRI - HUMMING ALONG - bjri sell side rating



Not surprisingly, BJ’s restaurant is currently being awarded a lofty multiple of 17.8x EV/EBITDA NTM.  Considering that DIN is currently trading at 9.3x, as the second most highly-valued company in the casual dining space behind BJRI, investors are clearly willing to pay up for the growth that BJ’s offers. 


In terms of top-line trends, the company bounced back strongly post-recession.  Last quarter’s company same-restaurant sales growth of 7.8% growth was an acceleration from the 4Q10 number despite a far more difficult compare for the first quarter.  Management struck a cautious tone regarding the second quarter, stating on March 20 that, excluding the shift in the Easter holiday and spring break vacations, same-restaurant sales were estimated to be trending at approximately +5.5%. 


This would imply a sequential slowdown in two-year average trends of 70 basis points.  Looking at California Sales Tax receipts for the second quarter, it seems that consumer spending in the Golden State was robust during April, May and June.  The two-year average trend, however, in sales tax receipts was slightly down.  Approximately half of BJRI’s restaurants are in California so the chart below suggests that strong 2Q trends could be in store for BJ’s California units.  


BJRI - HUMMING ALONG - bjri pod1








  • “Sales comparisons continue to be favorable to date for the second quarter.”
  • “Currently, we anticipate having about 3% of menu pricing for the second quarter and then menu pricing in the mid 2% range in both Q3 and Q4 for this year.”
  • “The recovery of the economy, the job market and consumer asset values all continue to be slow, choppy and geographically uneven. Foreclosure rates and unemployment rates are still quite high in many of the states that we operate restaurants. Additionally, as we all know, consumers are facing significantly higher grocery and gasoline prices, which could negatively impact the discretionary spending on restaurant occasions in general going forward.”
  • “So in light of all of these external factors that are outside of our control, our sales volumes remained difficult even for us to reliably predict so we don't even try to publicly predict them. And we also recommend that those who are in the business of predicting sales keep their expectations on the conservative side.”
  • “Additionally our comparable sales comparisons become increasingly more difficult as 2011 progresses.”
  • “Our guest traffic and throughput continue to benefit from improved operational execution driven by more complete management staffing levels and also by what we internally call our Quality Fast operational initiative.”
  • “We've intentionally kept most of our pricing power in reserve during the past couple of years.”
  • “Furthermore, I would expect that our weekly sales average will be a little less than our comparable restaurant sales for at least the second quarter of this year until some of our strong new restaurant openings from the latter part of the second half of 2009 enter our comparable sales base.”
  • “Additionally, as we mentioned, fiscal 2011 will be a 53-week year for us and therefore Q4 will be comprised of 14 weeks as compared to our traditional 13-week quarters.”




  • “We continue to believe that the battle for casual dining market share is going to be a much more significant factor going forward than it has been historically, primarily because the casual dining segment doesn't have as strong of a macroeconomic tailwind that it enjoyed during the past couple of decades.”
  • “Now having said that, annual casual dining segment sales are still estimated to be well north of $80 billion and annual sales growth for casual dining chains, excluding the independent casual dining operators, is still expected by most observers to be in the 4% to 5% range for the next couple of years. Now that 4% to 5% projected increase in casual dining chain sales would likely be comprised of a 2% to 3% annual increase in capacity and a 2% or so increase in sales on the existing capacity base.”
  • Increased capacity base as measured by total restaurant operating lease in the low double-digits during the next couple of years in the approximate range of 12% to 13%. Additionally, over the longer run, we also expect annual sales increases on our existing capacity base to eventually settle in the 2% to 3% range, assuming a more normalized cost and operating environment.
  • So it's our intention to continue to gain market share at a much higher rate than the expected growth rate for the overall casual dining segment.



  • “With respect to our new restaurant expansion plan, we've successfully opened two new restaurants during the first quarter of 2011. We remain very pleased with the initial sales volumes of those two new restaurants. We have seven restaurants currently under construction for potential openings later this year. We remain solidly on track to open as many as 12 to 13 new restaurants during 2011 and achieve our capacity growth goal for this year. And we're well under way in securing high quality locations for potential new restaurant openings in 2012.”
  • “Our development plan for this year calls for all of our new restaurants to be developed within a 13 state footprint which will allow us to continue leveraging our brand position, consumer awareness, supply-chain infrastructure and field supervision resources.”
  • “All of our remaining 2011 openings have been identified and secured with signed leases or letters of intent. Seven of these restaurants are currently under construction.”
  • “As of today we still are targeting approximately $75 million in gross capital expenditures for 2011, which we anticipate funding from cash flow from operations as well as our expected landlord allowances and our current cash and investment balances.”
  • “Anticipate opening costs of approximately $1.7 million to $2 million in the second quarter related to the expected three new openings in the quarter plus preopening rent for restaurants expected to open later in 2011.”



  • “While we are currently beginning to see some relief in our produce costs, I still anticipate higher cost of sales for the remainder of 2011.
  • “In regard to the cost of sales for the rest of 2011 and based on information available and our expectations as of today, we currently estimate the total cost of our food commodity basket to increase approximately 4% during the second half of 2011. As I mentioned earlier, we started seeing a more pronounced increase in our actual commodity costs towards the March period as compared to January and February. As such, I anticipate cost of sales for the remainder of 2011 to be around 25% or so.”
  • “In regards to labor, we currently do not anticipate significant pressure for the remainder of 2011 for both wages and salaries. As such, the slight increase or decrease in labor as a percent of sales will be more based on the ability to gain leverage on our comparable restaurant sales.”
  • “In general, I would expect to see some increase in operating and occupancy as a percent of sales for the remainder of 2011 due to some higher energy costs. We are still anticipating a 3% increase in these costs per operating week as compared to 2010. As such, much like labor, the change as a percent of sales in operating and occupancy will be more dependent on the leverage obtained from comparable restaurant sales.”
  • “I would anticipate our G&A costs to be slightly less than Q1 costs as a result of some lower recruiting costs but in general I would anticipate G&A to be around the $9.7 million to $10 million per quarter including equity compensation. And as expected it would be slightly greater than that range in that quarter due to the extra week.”


Howard Penney

Managing Director


Rory Green






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