TODAY’S S&P 500 SET-UP - August 1, 2011


With the most anticipated headline since ‘sun rising in the East’ behind us, the question for risk managers now isn’t about debt deals – it’s about Growth and Earnings Expectations. I’m looking for those 2 things and Europig problems to take back the headlines in the coming week.  As we look at today’s set up for the S&P 500, the range is 30 points or -0.49% downside to 1286 and 1.84% upside to 1316.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -1028 (-303)  
  • VOLUME: NYSE 1209.50 (+22.56%)
  • VIX:  25.25 +6.36% YTD PERFORMANCE: +42.25%
  • SPX PUT/CALL RATIO: 2.30 from 1.60 (44.47%)



BONDS – we’ve been on the other side of the PIMCO “credit risk” trade (El-Erian) and focused more on the 2 things that have really provided a bid for bonds since April – US Growth Slowing and Inflation Expectations coming down.  New highs in 10 and 30 yr UST bonds on Friday into the “news” this morning.  Don’t forget Q1 2011 US GDP was restated at 0.4% on Friday!


  • TED SPREAD: 17.08
  • 3-MONTH T-BILL YIELD: 0.10% +0.03%
  • 10-Year: 2.82 from 2.98    
  • YIELD CURVE: 2.46 from 2.56


  •  10 a.m.: Construction spending, est. 0.1%, prior (-0.6%)
  • 10 a.m.: ISM Manufacturing, Jul, est. 54.5, prior 55.3
  • 11 a.m.: Export inspections: corn, soybeans, wheat
  • 11:30 a.m.: U.S. to sell $27b 3-mo., $24b 6-mo. bills
  • 4 p.m.: Weekly crop conditions


  • Deficit agreement would cut $917b in spending over a decade, raise debt limit initially by $900b and assign special congressional committee to find another $1.5t in deficit savings by late Nov., to be enacted by Christmas
  • HSBC to cut 30,000 jobs total worldwide by 2013 as part of plan to reduce costs by $2.5b-$3.5b; agreed to sell upstate NY branch network to First Niagara for ~$1b as it pares U.S. ops
  • FedEx (FDX) CEO “largely upbeat” on outlook as economy improves, businesses start building inventories: Barron’s



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Commodities Rally as Deal Avoids ‘Act of Collective Insanity’
  • Oil Advances From Two-Week Low as Lawmakers Reach Debt Agreement
  • Gold Drops From Record as Obama Says Lawmakers Reach Debt Deal
  • Copper Rises for Third Day as U.S. Debt Accord Averts Default
  • Wheat, Corn Climb as U.S. Debt-Ceiling Accord Avoids Default
  • Sugar Rises on Signals Demand Remains Steady; Coffee Advances
  • Russia Targets Asia With Cheapest Wheat After Putin’s Export Ban
  • ArcelorMittal, Peabody to Put Hostile Bid to Macarthur Holders
  • S. African CEOs Told by Eunomix Nationalization May Happen
  • Funds Raise Bullish Commodity Bets as Silver Holdings Jump
  • BHP Billiton Workers Resume Strikes at Australian Coal Mines
  • India’s Cotton Exports May Be Limited on ‘Lackluster’ Demand
  • Commodities Beat Stocks, Bonds in July Amid China Expansion



EUR/USD – this is the one strike price that should continue to whip around in the next 48 hours as we finally put this dog to bed; watch 1.43 as your TREND line that inflates/deflates everything else (across asset classes). The global market’s correlation risk moves off that.


THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: wet Kleenex action continues with European stocks doing nothing on the "news" that is only news to people who need to make it news
  • July final Manufacturing PMI; France 50.5 vs preliminary 50.1; Germany 52.0 vs preliminary 52.1; Eurozone 50.4 vs preliminary 50.4; UK Jul Manufacturing PMI 49.1 vs consensus 51.0, prior revised 51.4 from 51.3

THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: broad based rally; no surprises; no consequential levels breached on the upside - I'm long China and India currently.
  • China July PMI 50.7 vs 50.1 cons and 50.9 seq.
  • Australia July manufacturing index 43.4 vs 52.9 seq.
  • Australia June new home sales (8.7%) m/m.

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

Congress Holds Court

This note was originally published at 8am on July 27, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 $1599-1624, $98.06-100.81, and 1326-1353, 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


The Macau Metro Monitor, August 1, 2011




July Macau GGR rose 48.4% YoY to 24.2MOP BN (23.5HKD BN, 3.02US BN).



According to China Real Estate Index System, residential property prices in 100 major cities in China rose 0.21% in July from June, slower than June's 0.41% MoM increase.




get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

Old Slate

“We’re not just going to start with a clean slate, we’re going to throw the old slate away.”

-Vince Lombardi (1959)


That was one of the first iconic leadership quotes to come out of Vince Lombardi’s mouth when he moved his family to Green Bay, Wisconsin in 1959 (page 207 of “When Pride Still Mattered”, by David Maraniss).


As all great leaders across history have proven, results matter more than rhetoric. But, when you can combine both, you have the holy grail of life’s opportunities – to “be the change you want to see in this world” (Gandhi).


Barack Obama and Johnny Boehner are not Gandhi. Neither are they Lombardi. These two gentlemen would have a tough time leading me to the men’s room at a Yale Hockey game without forming a committee. And, sadly, after we get this morning’s stock market rally out of the way, we’re all going to be stuck with their same Old Slate.


This isn’t to say that this gong show of a Debt Ceiling Debate isn’t going to help America start with a clean slate. First though, we need to throw away the old one! That will take time. Change is a process; not a point.


Back to the Global Macro Grind


With the most anticipated headline since ‘sun rising in the East’ behind us, the question for Risk Managers now isn’t about the mechanics of the debt “deal” (it will be back end loaded and will not move the dial until all of these politicians are gone) – it’s about Global Growth and Earnings Expectations – both are still too high.


Here’s how the globally interconnected market is reacting to the “news” that Washington does career risk management:

  1. STOCKS – Asia rallied across the board to lower-highs and remains the best looking region of the 3 majors (Asia/Europe/USA); European Equities are up marginally on low volume and basically still look awful; US Equities have immediate-term downside support at 1286, but a wall of intermediate-term TREND resistance up at 1319 on the SP500.
  2. TREASURY BONDS – We’ve been on the other side of the PIMCO “credit risk” trade (El-Erian) and focused more on the two things that have really provided a bid for bonds since April – US Growth Slowing and Inflation Expectations coming down. We saw new highs in 10 and 30-year UST bonds on Friday into the “news.” Now Treasuries are immediate-term TRADE overbought.
  3. EUR/USD – This is the one strike price that should continue to whip around in the next 48 hours as we finally put this debt deal dog to bed. Watch $1.43 as your TREND line that inflates/deflates everything else (across asset classes). The global market’s Correlation Risk moves off that.

From the Eurocrats to the Fiat Fools of the Keynesian Kingdom in America, do any of these people realize the causal relationship between debt and growth?


Republicans and Democrats, Reid my Boehner on this:




That’s it. So keep it simple stupid. The only thing that you are really doing to global markets and economies are:

  1. Shortening economic cycles
  2. Amplifying market volatility

How short was the last “bullish” economic cycle? You tell me (if you are a Washington/Wall Street person you will have a different answer to this question than Main Street, fyi). The only thing worse than Friday’s Q2 US GDP report of 1.3% is the thought that the government’s made-up number could be off by 81%! (Q1’s was restated at 0.36% versus 1.92% prior!!!)


I think that’s the first time I have used 3 exclamation points in an Early Look. Re-read that fact about reported US GDP. Maybe I should have used six!!!!!!


Either these Republicans and/or Democrats figure out how to throw out this Old Slate of failed economic policy, or The People are going to throw all of them out. That’s the change I can believe in.


My immediate-term support and resistance ranges for Gold (sold ours last week), Oil (no position), and the SP500 (no position) are now $1, $95.96-100.49, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Old Slate - Chart of the Day


Old Slate - Virtual Portfolio


The central tenet surrounding the bull case for Wendy’s which lies at the core of fixing the Wendy’s brand is the rollout of the new hamburger, beginning in 2H11.  In January, our fundamental view of the stock was positive but, various red flags over the past six months have moved us to change that stance.  The most important of which is this: we are now in 2H11 and there still appears to be issues with rollout of the new product.


It was reported on Friday that WEN is suing franchisees Lewis Topper and Jeffrey Coghlan and their WendPartners Franchise Group, alleging breach of contract and claiming they missed deadlines to buy and install bun toasters.


Lewis Topper and Jeff Coghlan are not insignificant franchisees.  Both have been inducted into the Wendy's Hall of Fame and sit on the board of directors of OFFA - the Old Fashioned Franchise Association.   According to the OFFA web site, the purpose of the organization “is to give Wendy’s franchisees a voice.”   


The OFFA Mission states, “By positively representing the collective interest of the franchise community, we are reasserting the importance of franchisee involvement in the management decision making process.  We are the only independent franchisee organization in the Wendy’s system. We are dedicated to preserving the values Dave Thomas instilled in Wendy’s franchisees from the beginning and to enhancing our members’ investment and profitability.”


The key part of the mission of OFFA is “enhancing our members’ investment and profitability.”  The WEN system seems to be fully behind the idea of the new hamburgers, but there has been some disagreement around the type of toasters to be used and the appropriate testing of the product since January.  Toasting the buns of the new hamburger was emphasized as a key component of the new product by management.  An example of the one of the toasters that was tested by Wendy’s is pictured below.  The machine costs approximately $10,000. 





My guess is that the disagreement between management and the franchisees anchors on the question of who is going to pay for the equipment and whether or not the company has provided adequate evidence that the franchisees’ investment in the equipment will yield an adequate ROI.  We believe that WEN management is on the right track, but the path to recovery is clearly taking longer than had been expected.  As the news on toasters is hitting the tape, it seems that the breakfast rollout and remodel program are also experiencing some difficulties. 


If the issue of paying for the toasting equipment could very important if it is a leading indicator for the larger discussion of which parties will bear what proportion of the cost of upgrading the asset base.  While I think the company may have gone back to the drawing board for a better plan as it relates to the remodels, the most crucial question at this juncture is how much, if any, financial support the company will provide the franchise system in carrying out the program.  Needless to say, the impact of these disputes has the potential to be a drag on EPS which may not be factored in to consensus estimates for 2012.  Indeed, as MCD marches forward with its remodel program, the longer WEN takes to resolve these issues, the more share the company is likely to lose to MCD.  The potential turmoil between the franchisees and management can only slow the potential progress of breathing life back into the Wendy's brand!


The street has been getting slightly more bullish of late, while the short interest in the stock is low but rising.  MCD has been posting some strong sales results, which is likely making life more difficult for Wendy’s.  Each issue that arises, whether it is around investing in new kitchen equipment, reaching consensus on breakfast, or the remodel program, pushes out the timeline for the turnaround further. 


At Hedgeye, we define our investment stance on each stock on three distinct durations: “Trade”, meaning three weeks or less, “Trend”, meaning three months or more and “Tail” meaning three years or less.  Given the issues that are weighing down WEN’s turnaround story, we are currently negative on a Trade duration, but bullish on the Tail. 







Howard Penney

Managing Director


Rory Green





investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.