Exceptional Day

This note was originally published at 8am on July 22, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The ignorant man marvels at the exceptional.”

-George D. Boardman


George Boardman was an accomplished American man from Maine. Graduating in 1822, he was Colby College’s first graduate. He had exceptional success as a global missionary.


Most of the people I know who accomplish great things in this good life don’t marvel at their accomplishments. They wake up every morning expecting it of themselves. They also expect adversity. In fact, most of them can’t live without it.


Yesterday was an Exceptional Day for Europe. I, for one, got royally squeezed in my European shorts by it. After going through the wringer on plenty of these centrally planned short squeezes since 2008, I’ve stopped marveling at them. This is what the Fiat Fools do. Whether it was TARP in 2008 or what you saw yesterday, short-term volatility only perpetuates the long-term problem.


Members of the European Keynesian Kingdom (EKK) emerged from their 3 hour lunch yesterday with a statement that Greece needed an “exceptional and unique solution.”


Then, they offered the bankrupt nation $229 BILLION in new aid (~75% of GDP!)…


Then, they spent the rest of the day gloating about their short-term political success…


That’s what professional politicians promising the arrest of gravity do.


Germany’s leader of Short-Termism, Angela Merkel, emerged from the meetings in Brussels proclaiming her mystery of faith saying: “I am satisfied with the outcome because the euro countries showed today that we are up to the challenge, we can take action.”


True, Mrs Merkel – for a day. But what shall you do tomorrow? Another European summit? How about next week? Any plans for August?


In all things risk management tomorrow starts today. Rather than marveling at your wins or loses, you’re job is to put on the trades today that will position you to not lose money tomorrow. Being awestruck by an exceptional market move can freeze you. Don’t let that happen. Out of sight, out of mind – onto the next.


My short-term performance problem in Europe yesterday aside, we had a great day on the long side of everything we’re long in US Equities. Covering my short position in the SP500 on July 5thhas allowed me to broaden my horizons and move to our most invested position in Global Macro for 2011 YTD (drawing down my Cash position to 43%).


What that doesn’t mean is that I should be marveling at those gains. Given our Q3 Macro Theme of “Risk Ranger”, I should be selling some of my gross long exposure in the US today and adding to my short exposures in Europe. The core tenant of the Risk Ranger theme is implied in the name – manage your risk within proactively predictable ranges of market prices.


So let’s do that – in Global Equities here are the intermediate-term TREND ranges we plan to use in Q3, until the plan changes:

  1. USA – SP500 range of 1241-1377
  2. CHINA – Shanghai Composite range of 2629-2849
  3. JAPAN – Nikkei range of 9670-10227
  4. INDIA – BSE Sensex range of 17611-19409
  5. GERMANY - DAX range of 7075-7451
  6. SPAIN - IBEX range of 9251-10405
  7. ITALY – MIB range of 17614-20889
  8. GREECE – ATG range of 1151-1346
  9. BRAZIL – Bovespa range of 58521-63929
  10. CANADA – TSE range of 12811-13765

That’s it. There’s nothing exceptional about today or how we are going to manage risk around it. We have our intermediate-term strategy and, as we whip around both the US Debt Ceiling debate and European Sovereign Debt Crisis, we’re sticking to it. As you can see, not 1 of the top-side’s in our intermediate-term TREND ranges was violated to the upside yesterday.


My immediate-term TRADE ranges (different duration than the TREND) for Gold (we’re long, and we bought Silver yesterday too), Oil (no position), and the SP500 (no position) are now $1585-1619, $97.21-99.76, and 1319-1351, respectively.


Enjoy the storytelling of the Fiat Fools and, of course, an exceptional weekend,



Keith R. McCullough
Chief Executive Officer


Exceptional Day - Chart of the Day


Exceptional Day - Virtual Portfolio


TODAY’S S&P 500 SET-UP - July 27, 2011


If you’re leaning long US Equities and Short Italian/Spanish ones, you’re having a good week. This is where Global Macro gets fun.  As we look at today’s set up for the S&P 500, the range is 27 points or -0.45% downside to 1326 and 1.58% upside to 1353.




Being long cyclicals under the assumption that their margins and earnings aren’t cyclical has been one of the more perplexing bull cases we have heard in 2011. The Industrials (XLI) got hammered on that reality today, closing down -1.9%.  Selling in the Industrials (XLI) was broad based.   Only 4 members of the XLI were up on the day and GE has effectively gone straight down since reporting on Friday. This makes the Industrials the worst looking sector in the market all of sudden. Comparing to the Financials (XLF), that’s saying something.




THE HEDGEYE DAILY OUTLOOK - daily sector view






  • ADVANCE/DECLINE LINE: -974 (+875)  
  • VOLUME: NYSE 837.02 (+9.61%)
  • VIX:  17.52 -0.23% YTD PERFORMANCE: -1.30%
  • SPX PUT/CALL RATIO: 1.99 from 1.65 (+20.32%)


  • TED SPREAD: 19.16
  • 3-MONTH T-BILL YIELD: 0.07%
  • 10-Year: 2.99 from 3.03   
  • YIELD CURVE: 2.58 from 2.61


  • 7 a.m.: MBA Mortgage, prior 15.5%
  • 8:30 a.m.: Durable goods, est. 0.3%, prior 2.1%
  • 10:30 a.m.: DoE inventories
  • 11:30 a.m.: U.S. to sell $12b 5-day cash mgmt bills
  • 1 p.m.: U.S. to sell $35b 5-yr notes
  • 2 p.m.: Fed’s Beige book


  • House Speaker Boehner is facing resistance from within his own party; presidential candidate Michele Bachmann said she wouldn’t back his plan
  • Daimler said 2Q operating profit rose 23%, led by sales of Mercedes-Benz S-Class and E-Class sedans
  • Senate Finance Committee hears from Wal-Mart, Kimberly- Clark, CVS Caremark CEOs on how the tax code affects hiring. 10 a.m.
  • U.S. banks are arguing over how costs of planned deal with federal, state officials over home foreclosures should be divided, people familiar tell WSJ



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Oil Falls on Bets Rising U.S. Stockpiles Show Demand Is Slowing
  • Corn Drops as Rainfall in U.S. Eases Concerns on Yield Losses
  • Copper May Decline Before Figures on U.S. Durable-Goods Orders
  • Cocoa Falls as Ivory Coast Crop May Reach Record; Coffee Slides
  • Palladium to Gain on Japan Auto Demand, China Capital Says
  • Mumbai Blasts May Hasten Diamond Traders Relocation to Bourse
  • Rice Stockpiles in Japan May Drop to 4-Year Low After Quake
  • DP World Digs London Gateway as Economy Slows: Freight Markets
  • U.S. Steel Joins 9-Out-of-10 Club With Slump: Chart of the Day
  • India Winemakers Tap Growth as Duties Boost Imports’ Prices
  • Ethanol to Brazil Hits Record on Soaring Sugar: Energy Markets
  • BHP Rejects Escondida Talks as Coal Strikes Resume in Australia


  • EUR/USD – I would have expected to see the Euro side of this pair down hard this morning, but it’s down 10bps; away from hedge funds capitulating (covering Euros) yesterday, the big support mechanism for the Euro is Obama getting nothing done on debt deal


THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: Italy getting smoked again, down another -2% with no support on MIB Index to 17,760; we are long US stocks and short European ones.
  • European Banks – Goldman is out with a similar call that Josh Steiner (our Financials Sector Head) made 2 weeks ago; this is not new but it’s good to see consensus focusing on it this morning; 13 European banks have over 200% of their Tier1 Cap in “Europig” bonds
  • ITALY – CDS is up +22bps this morning testing the Lehman Line (300bps CDS) and the MIB Index is getting hammered for another -2% drawdown; don’t forget that Italian stocks have already crashed in 2011 (peak to trough), so this is a resumption of TREND






  • ASIA: solid session where we care with China up +0.8% in day2 of rail recovery; Indonesia blasting higher to +12.4% YTD; KOSPI holds support











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.

Congress Holds Court

“If we get jammed up, we're holding court on the street.”

-Jimmy Coughlin, “The Town” (2010)


Just when I thought the biggest tail risk to whatever remains of our free-market lives (Congress) couldn’t find lower-lows, the Republicans redefined the ridiculous yesterday.


In a must read section of a Bloomberg News article by Julie Hirschfeld Davis this morning, Republican Congressman Kevin McCarthy of California gets YouTubed for playing a clip from “The Town” to inspire the Republican troops at their party headquarters yesterday.


I don’t think Julie could have made up this scene if she tried. To put this movie in context (in case you haven’t seen it, it’s an outstanding movie directed in 2010 by Ben Affleck with a 4.5 star rating on Netflix), this is a Boston bank robber movie where the aforementioned character that I quoted (“Jim”, played by Jeremy Renner) is as emotionally unglued as the VIX.


Back to the Global Macro Grind


The VIX (the Volatility Index) is up +15.6% in a straight line this week as Congress Holds Court, watches gangster movies, and does their best to implode the US Dollar (down another -0.9% yesterday, taking its cumulative losses to -2.2% in the last 7 trading days).


This is not only a national embarrassment for the country, but a professional embarrassment for each and every one of these morons who don’t realize that the entire world is watching them – real-time.


Did I call them morons? Sorry, I meant Market Morons. Not all of them, some of them, couldn’t tell you what a EUR/USD currency trade in swap means or where to execute it. All the while the entire world’s globally interconnected risk trades off of their unawareness. Nice.


Domestically, this analytical incompetence isn’t lost on people. Actually, it isn’t Internationally either. In terms of scoring the Fiat Fools globally, consider the following polls:

  1. USA – Congress hits new low in yesterday’s Rasmussen reading; only 6% of Americans think Congress is doing a good job
  2. JAPAN – Japanese PM Naoto Kan’s approval rating hit a fresh new low yesterday of 17.1% (that’s lower than Obama’s!)
  3. ITALY – Embattled hot-tubing Prime Minister, Silvio Berlusconi’s approval ratings are dropping 1000 basis points a month

What do all of these countries and their said/sad leadership have in common? Print LOTS OF MONEY!


Yeah baby, print it – and if you get jammed up with a 17 year-old while swimming naked or swilling with some Republicans in de Club, just bust out some fear-mongering and hold court on the manic media’s streets. They need content.


If you didn’t know this is all ending the way that gravity predicted it would, now you know. Thank God for that.


What to do with your hard earned money?


I’ve actually taken this gong show as an opportunity to get invested. Yesterday, on weakness, I bought the US Dollar (UUP) and Indian Equities (INP), taking my Cash position in the Hedgeye Asset Allocation Model down to its 2nd lowest level of the year (37%).


This doesn’t make me a raging bull. This simply makes me a buyer on red and a seller on green. As we outlined in our Q3 Macro Themes call a few weeks ago, as the Fiat Fools of our world play “Policy Pong” with our markets, we should stop getting frustrated by it – and just trade it. Be a “Risk Ranger” (another Q3 Theme) and trade risk around the range.


Yes, buy-and-hold fans, trading is a required exercise in modern day risk management. Doesn’t that make me a “short-termist” when our longest of long-term views have been what has really led us to being right on 2011 Growth Slowing As Inflation Accelerates? The Fiat Fools and their policies do 2 very specific things to your economies and markets:


1.       They shorten economic cycles

2.       They amplify market volatility


And on that note about volatility, I’ll end this morning’s missive where I began – with a preview of the next episode of “The Town’s” Debt Ceiling from our squirrely friend Jimmy, who so seemingly inspired Republican Congressman McCarthy yesterday: “Secrets with this one.”


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $98.06-100.81, and 1, respectively. Buy low. Sell high.


Best of luck out there today and enjoy the show,



Keith R. McCullough
Chief Executive Officer 


Congress Holds Court - Chart of the Day


Congress Holds Court - Virtual Portfolio


We were convinced from our analysis of KONA that the company was going to perform well through 2011 and viewed the stock favorably as a result.  Over the past month KONA has been the best performing casual dining name over the past month (up 23.4%) and is now up 62% year-to-date. 


Early in the quarter, there were some serious questions raised about the future following former CEO Mark Buehler's resignation.  As we wrote on June 9th, the departure of the CEO was not related to weakness in the business and the 2Q financial performance confirmed our thesis. 


KONA 2Q EPS came in at $0.08 or $0.11 ex-special charges.  Same-restaurant sales came in at +9.1%, implying two-year average trends 180 basis points above those in 1Q11.  Management also provided some conservative sales guidance for the upcoming quarter.  Guidance is for 6% same-restaurant sales in the third quarter, including 3% price.  This comp guidance, implies two-year average trends of 3%.  This would be a sequential slowdown from the two-year average trend in 2Q but it would likely bolster investor confidence in the company’s ability to continue to grow share.  The 3Q trends suggest that the company will post positive SSS for seven straight quarters. Currently KONA is running about 2.2% in pricing; the company took about 150 basis points in June to help offset higher commodity costs.


Restaurant level margins also increased year-over-year during 2Q11to 17.2% versus to 16.3% last year. On a sequential basis, restaurant operating profit improved 320 basis points over 1Q11.


We continue to like the KONA story.








Howard Penney

Managing Director


Rory Green



BWLD reported earnings after the close and EPS came in below expectations at $0.58 versus $0.60.  Comps, however, blew away consensus with company comps gaining 5.9% year-over-year versus consensus +3.6%.  Franchise comps, too exceeded expectations at +2.7% versus +1.6%. 


Below are our Top Ten Takeaways from the quarter:

  1. The same-restaurant sales trends are a huge positive for BWLD.  Despite the earnings miss, which is impacting the after-hour trading, people are coming through the door and the resolution of the NFL lockout dispute is another positive for the second half of the year besides the obvious appeal consumers have for the brand.
  2. Strong comps are likely to continue, in our view, as the football season gets underway and the company increases its media presence in the third and fourth quarter.  The company gave the to-date 3Q number as 4.9% which, if it were the reported 3Q comp, would imply a further 90 basis point acceleration in two-year average trends from the 2Q number. 
  3. The company is not taking price, aside from a nominal 10 or 20 basis point increase with the new menu in September, in the near future.  Thanks to benign chicken wing prices, the company can afford to let price roll off the menu.
  4. Chicken wing costs, the most important commodity for BWLD, continue to be favorable in the third quarter.  For the first two months of the third quarter, wing costs are averaging around $1.14 per pound versus $1.42 during the third quarter of 2010. 
  5. Operating margin came in lower than expected largely due to higher preopening expense and G&A expense.  Some of the increase in G&A was due to higher recruiting and training costs for restaurants opening in the new West Coast market.  This is because the new markets do not have the training centers and number of existing personnel required to train new hires.  Preopening expenses are also up as unit growth continues at a fast pace.
  6. Restaurant operating margin, a more pure assessment of restaurant performance in our view, increased year-over-year.  Food, operating, and occupancy costs were favorable while labor costs were up slightly year-over-year as higher labor costs were incurred in new markets.
  7. The company’s earnings power is strong.  Despite EPS coming in below expectations, largely because of increased G&A and preopening expense, net earnings growth in the first six months of 2011 was over 29%.  The company has raised its expected annual net earnings goal for the year from 18% to “more than 20%” as a result of the strong performance.
  8. New unit growth is set to continue to contribute to returns but will also keep G&A and preopening expenses elevated.  The cost of training people in new markets where there is a lack of training centers is higher than training people in new markets.  In the second half of the year management is guiding to 29 company store openings, 37 franchisee openings and 3 in Canada.   As long as new unit volumes remain strong, we believe that the cost of growth is worth the price for shareholders. Management calls the expenses, “investments in our future”.
  9. As the company is opening new stores and expanding into new markets, it is also closing older, lower volume locations.  We believe that this is positive for the company in the intermediate-to-long tem despite the immediate term increase in costs associated with the closures.
  10. Continued innovation in the product and sports-related promotions are likely going to support traffic going forward into 2H11.  The lack of a significant price increase, when other restaurant chains are likely going to have to raise prices somewhat, could also help as customers continue to seek value.






Howard Penney

Managing Director


Rory Green


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