Tipping Points

This note was originally published at 8am on July 21, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 $1572-1623, $95.47-99.08, and 1319-1341, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Tipping Points - Chart of the Day


Tipping Points - Virtual Portfolio


The Macau Metro Monitor, July 26, 2011




According to the Macau Human Resources Office, in June, the number of non-resident workers totaled 85,273, a total of 1,234 more compared with May.  Mainland China continued to be the main source of imported labor, with 1,000 additional workers in June to 48,741.  The entertainment, gaming and hospitality sectors hired the most foreign workers during the reporting period, absorbing a total of 24,738 people.



Managing director Pansy Ho bought 36,285,523 shares of Shun Tak from her father at market price on Thursday, raising her stake in the company to 12.67% from 11%.  The purchase is valued at HK$177.4 million (US$22.8 million).  Shun Tak said the share purchase will not have any impact on any aspect of the affairs of the company.



Pansy Ho said, “The likelihood of [MGM China] investing in Taiwan is pretty high because now is a good time,” in a reference to Taiwan’s recent opening to individual tourists from the mainland.  “The investment plans will target hotels, as well as travel- and service-related businesses,” she said.



The Monetary Authority of Macau said that inflation is likely to intensify for the reminder of 2011.  For 2011, it estimates the inflation rate to reach a level slightly above 5.0%.  Inflation increased by 5.13% YoY for the first half of 2011.

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American Pride

“The measure of who we are is what we do with what we have.”

-Vince Lombardi


This weekend I finished the “heavy book” (Truman) and opted to do what I don’t do enough of – re-read my favorite books. If “When Pride Still Mattered – A Life of Vince Lombardi” can’t get you fired up to lead people in this good life, I don’t know what can.


Leadership isn’t what you saw coming out of Washington yesterday. That was a joke. As Lombardi reminds us, “leaders aren’t born, they are made.” And President Obama is learning that lesson the hard way right now – unfortunately, on the job.


I’ve written about this for what feels like forever now, but the reality of both the Bush and Obama Administrations is that the American people don’t like either. Americans aren’t stupid. They know who these people are by watching what they do with what they have. Both Bush and Obama had/have awful economic advisors.


Back to the Global Macro Grind


Last night, after the President of the United States fear-mongered the country that we could face a “deep economic crisis”, the rest of the world’s market participants took his word for it and said ok, we’ll sell more US Dollars on that.


Can you imagine the leader of any great team delivering that message to the troops on the week of the one of the biggest games is US history? I can. I’ve seen plenty of losing coaches in my day, and so have you. Obama better wakeup to a winning message – and soon.


The good news is that market prices are already discounting political gravity. If you haven’t noticed, professional politicians chase polls and the President’s approval rating won’t be flushed out of the toilet until he makes a decision to get a deal done.


Here’s how I see this globally interconnected marketplace discounting Obama bellying up to the bar:


1.   US Dollar – yes it was down -1.2% last week and, yes, it’s down on “no deal” already for the week-to-date. But, the US Dollar Index is finally making higher-all-time-lows on selloffs. All-time is a long-time. Obama, this buck stops going down with you.


2.   US Treasuries – you know you have basically no stroke with markets when 3 of the “top” central planners of America (Obama, Geithner, and Daley) try to scare the living hell out of the bond market, and Treasury Yields move a beep. Or was it 2 beeps?


3.   US Stocks – like Braveheart, US stocks are holding every line of support that matters. Holding our TRADE line of support (1325). Holding our intermediate-term TREND line of support (1319). “Hold… hold…”


The People of America are like that. I’m sure Lombardi would agree that our markets are a measure of who we are. We are resilient. We are fighters. And we will not let conflicted and compromised politicians decide our future.


This will not be easy. This won’t change the fact that Washington/Wall Street has been wrong on their US GDP Growth estimates by about a half in 2011 either. But this definition of leadership will not continue.


America will do what she needs to do with what she has to make sure of that.


My immediate-term support and resistance ranges for Gold (sold ours yesterday), Oil (no position), and the SP500 are now $1, $97.90-100.55, and 1, respectively.


Best of luck out there today and God Bless America,



Keith R. McCullough
Chief Executive Officer


American Pride - Chart of the Day


American Pride - Virtual Portfolio




TODAY’S S&P 500 SET-UP - July 26, 2011


Instead of making a decision, Obama reverts to the fear-mongering last night. The US Dollar falls. Treasuries move a beep. UK reports another stinky stagflation number – and upward and onward we go with our risk management day.  As we look at today’s set up for the S&P 500, the range is 27 points or -0.93% downside to 1325 and 1.09% upside to 1352.






THE HEDGEYE DAILY OUTLOOK - global performance


THE HEDGEYE DAILY OUTLOOK - daily sector view




  • ADVANCE/DECLINE LINE: -1809 (-1704)  
  • VOLUME: NYSE 763.67 (+3.44%)
  • VIX:  17.52 -0.23% YTD PERFORMANCE: -1.30%
  • SPX PUT/CALL RATIO: 1.58 from 1.16 (-35.41%)


  • TED SPREAD: 20.63
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 3.03 from 2.99   
  • YIELD CURVE: 2.61 from 2.59


  • 7:45 a.m./8:55 a.m.: Retail weekly sales from ICSC/Redbook
  • 9 a.m.: S&P/CaseShiller 20 City MoM% est. 0.0%, prior 0.09%
  • 10 a.m.: Consumer Confidence, est. 56.0, prior 58.5  
  • 10 a.m.: Richmond Fed Manufacturing, Jul, est. 5, prior 3  
  • 10 a.m.: New Home Sales, Jun, est. 320k (up 0.3%) from 319k
  • 11:30 a.m.: U.S. to sell $18b 4-wk, $20b 52-wk bills
  • 1 p.m.: U.S. to auction $35b 2-yr notes
  • 2 p.m.: Fed’s Hoenig testifies on monetary policy


  • The dollar sank to a record low versus the Swiss franc and Treasuries fell amid little signs of progress to resolve U.S. debt talks
  • Dunkin Brands prices IPO after the close
  • IMF chief Lagarde addresses Council on Foreign Relations



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Drought Withers Smallest Hay Crop in Century to Boost Beef Costs
  • Gold May Decline After Rally to Record Amid U.S. Debt Stalemate
  • Sugar Rises on Speculation Supplies Are Limited; Coffee Advances
  • Japan Corn Cargoes at Quarter-Century Low: Freight Markets
  • Morgan Stanley Raises Gold, Silver Targets Through to 2016
  • Gold Miners in South Africa to Join Strikes Hurting BHP, Anglo
  • Oil Supplies Decline for Eighth Week in Survey: Energy Markets
  • Grain Volatility to Stay on Low Stockpiles, Surging Demand
  • Global Natural-Rubber Demand May Grow 3.8%, Palanivel Forecasts
  • Cows-for-Bride Inflation Spurs Cattle Theft in South Sudan
  • Rice Husks Follow Solar to Power Indian Towns Off Utility Grid
  • Rice, Sugar-Cane Crops to Benefit From ‘Good’ India Monsoon Rain
  • India May Consider Additional Sugar Exports After September
  • Japan to Recall Tainted Beef as Cesium Contamination Widens


  • USD – the only good news here is that the USD is still making higher-lows; the bad news is that America has an opportunity to seize the moment and can’t, yet. The intermediate-term TREND line for the USD Index is $74.79 and needs to be recovered.
  • EURO – finally trades above Hedgeye's 1.43 line of intermediate-term TREND resistance, but can it hold? We’ll give this through August 2nd to make sure to not get sucked into a head-fake. We think Europe’s issues are much more severe than America’s for next 3 months.


THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: stinky stagflation in the UK and big time failures in Spain/Italy/Greece to recover TREND lines (all bearish) with Finland following
  • SPAIN: Spanish stocks down small this morning, but the breakdown yesterday is what mattered. We have immediate-term TRADE downside in the IBEX to 9215 – that’s -6.5% lower and what our models consider probable.

THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: rock solid recovery day across the board in Asia with every major market up but India who rightly raised rates to quash inflation pressure

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director


Below is an excerpt from the Dunkin' Donuts Black Book that we published today.


With valuations for the DNKN peer group having increased 56% over the past 12-months, the aggregated market caps of the few largest publicly traded coffee-centric companies almost equals the entire US coffee market’s annual revenues.


According to the National Coffee Association, the US coffee market represented $34 billion in 2009; the specialty coffee category generated $15-17 billion in annual revenues and the traditional category brought in $17-19 billion.  It would be a conservative measure to assume the high end of these ranges to estimate the present size of the market, bringing the current size of the market to $36 billion.  The coffee space is partly comprised of some very sizable companies with significant capital reserves that compete fiercely with one another for market share.  A front-runner in the corporate coffee war thus far is Green Mountain.  The company’s domination of the “at-home” coffee industry through Keurig machines and K-Cups has generated handsome returns.   The growth prospects for GMCR remain vast, at least if you share the view of investors; the stock currently trades at 29x EV/EBITDA and has a market capitalization of approximately $14 billion.  Green Mountain’s market cap equals roughly 40% of the estimated $36 billion US coffee market’s revenues or 117% of the “at-home” US coffee market’s $12 billion in annual sales.  While GMCR has recently expanded into Canada, the company is close to a pure play on the US market.


Turning to Starbucks, if we apply a 7x multiple to the company’s US EBITDA, the business would be valued between $10-11 Billion.  This hypothetical value, added to the Green Mountain market cap, implies that the cumulative market caps of the two companies equals roughly 70% of the entire US coffee markets annual revenues.  Lastly, MCD on Friday became the first restaurant company to grow its market cap north of $100 billion largely due to strong 2Q earnings results that were driven by success in selling coffee and other beverages.  Could coffee stocks be in a bubble at the moment?  We certainly think so.







Howard Penney

Managing Director


Rory Green


Early Look

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