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The Cavalier Cowboy

“The American Republic will endure until the day the Congress discovers it can bribe the public with the public’s money.”

-Alexis de Tocqueville


I have my doubts that Texas Governor Rick Perry has ever read Alexis de Tocqueville.  This is not to say that he is not an intelligent and well-read person, but he just doesn’t strike me as a person who really cares what a Frenchman wrote about America over 150 years ago.  Regardless, de Tocqueville and Perry certainly share common ground on their suspicion of government.


In his kick off speech this past weekend, Perry went directly to the heart of his view on government:


“That’s why we reject this President’s unbridled fixation on taking more money out of the wallets and pocketbooks of American families and employers and giving it to the central government.  ‘Spreading the wealth’ punishes success while setting America on a course to greater dependence on government.”


As the early and vitriolic attacks from the left have shown, The Cavalier Cowboy has them right rattled only a few days into his campaign.  Meanwhile over on the political right, if his political competitors haven’t shown they are rattled publicly, they will soon.  A recent Rasmussen poll shows Perry with 29% support for the Republican nomination, Romney at 18%, and Bachman running a distant third at 13%.  As they say in Texas: Yeee-haw!


Clearly, Perry is experiencing a post-announcement bump in popularity and his poll numbers are likely to come down over the coming days.  On the other hand, if the first few days are any indication of the campaign Perry will run, his rhetoric is more than likely set to accelerate.


Perry has proven himself to very quotable early into his entrance into the campaign.  His most notable quote was a not-so-guised criticism of the Federal Reserve and Chairman Ben Bernanke.  Actually, forget guised critique, the cowboy from Paint Creek, Texas took a double barreled shotgun to the Fed with the following statement at a campaign event in Iowa:


“If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas.  Printing more money to play politics at this particular time in history is almost treasonous in my opinion.”


Perry could have chosen his words more carefully, but the interesting takeaway is that he is currently the front runner in the Republican field, could realistically become President, and has in one of his earliest campaign appearances taken a direct shot at the Federal Reserve.  Historically, a critique of the Federal Reserve has been left to the devices of more fringe candidates (enter Ron Paul), as the Fed has become an accepted institution in America.  Not so anymore.


Whether the nature and organization of the Federal Reserve truly becomes a central campaign issue over the next 18+ months is yet to be seen, but if it does Americans should welcome it.  With the proliferation of Keynesian economists in America over the last eighty years, the majority of Americans have largely accepted the role of the Federal Reserve in their economy despite the contra voices of economists such as Milton Friedman.


In Friedman’s classic, “Money Mischief: Episodes in Monetary History”, he wrote about the Fed:


“I have observed that non-economists find it almost impossible to believe that twelve people out of nineteen – none of whom have been elected by the public – sitting around a table in a magnificent Greek temple on Constitution Avenue in Washington have the awesome legal power to double or halve the total quantity of money in the system in the country.”


After both an extended and continued period of the lowest interest rates in U.S. history and two rounds of quantitative easing, monetary stimulus over the past two years have been largely ineffectual in promoting the Fed’s dual mandate of lowering unemployment and creating price stability.  In fact, the only real growth we’ve seen is in the size of the Fed’s balance sheet.  Time will tell whether The Cavalier Cowboy will have the staying power to win the Presidency, but in mainstreaming questions about the Fed, even if poorly worded, he is already doing a service to the country.


The other role that Perry will likely play is as a headwind to incremental monetary easing.  Our view currently is that the Fed will not implement another round of quantitative easing until we see at least three months of negative employment data, which places the potential timing for incremental easing into late 2011, at best.  Perry’s heightened rhetoric will only increase both scrutiny of the Fed and questions by certain Fed Governors of the real benefit of incremental easing, which could serve to lengthen the time frame on implementation of additional easing.


As the Fed continues to play the wait and see game related to lagging economic indicators, back in the market economy data continues to deteriorate.  Specifically, the high yield market has had it worst month in over twenty years.  High yield yields have backed up by more than 9% over the last thirty days and were up more than 14% at their peak. 


In the Chart of the Day, we emphasize this point by showing an index of credit default swaps on high yield bonds over the last year.  Credit default swaps on high yield bonds are now at yearly highs and are up more than 30% in the last thirty days.  Given that the Fed has explicitly stated that interest rates will not increase well into 2013, it is not interest rate risk the high yield market is signaling . . .


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Cavalier Cowboy - Chart of the Day


The Cavalier Cowboy - Virtual Portfolio


Bob Evans released 1QFY12 earnings results last night and printed, in the press release, the Knapp Track Casual Dining Index number for July.  This was curious because Malcolm is not releasing the June/July release until this weekend.


Bob Evans' press release, published last night, states that the July Knapp Track Casual Dining Index number is +0.9%.


We will wait for official confirmation from Malcolm (his report is set to be sent out this weekend), not least because the May Knapp Track number in the BOBE press release does not match the official Knapp Track number, but a 0.9% print would imply stable-to-slightly higher two-year average trends in the Index depending on what the final accounting period comparable restaurant sales number for June turns out to be.


As the compares become more and more difficult in the back half of the year, we expect headline numbers to come down.  Even assuming flat two-year average trends, which could be overly optimistic given the state of the consumer, the headline numbers should sequentially decline as we progress through the remainder of the year.



Howard Penney

Managing Director


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“Discovery consists in seeing what everyone else has seen and thinking what no one else has thought.”

-  Albert Szent-Gyorgyi, Hungarian Physiologist, Nobel Prize Winner


There are tipping points in time when suspicions become reality, hunches become facts, and theories become laws.  The umbrella, having being raised sufficiently, clicks.  Greek mathematician, physicist, and astronomer Archimedes was once asked, according to the Roman writer Vitruvius, to determine whether or not a crown made for King Hiero II was made entirely from gold or whether silver, or another cheaper alloy, had been furtively mixed in. 


An important caveat; the crown was not to be damaged in the process.  Soon thereafter, upon observing the rising water level in the baths as people entered the water, Archimedes realized a method by which he could measure the volume of the crown, or any irregular shape.  Knowing the volume and weight of the crown, he could easily determine the density and thereby verify the soundness of the ornament.  


Archimedes ran through the streets shouting “Eureka!”, or so the story goes.  These “Eureka” moments happen to all of us and are generally preceded by a period of reflection, or obliviousness, which makes the discovery all the more jarring. 


The stock market has certainly been jarred by the recent events in global macro.  Of course, some investors were ahead of the game.  George Soros had moved heavily to cash, for instance.  For the overall market, simply looking at a chart of the S&P 500 shows quite clearly that a sudden realization came upon investors that stocks were greatly overvalued.  For a proxy of the stress/fear levels on Wall Street upon this Eureka moment, and others in the past, simply take a glance at the chart at the bottom of this note. 


It has long been Hedgeye’s contention, and Keith’s task on a daily basis, to highlight that big government intervention shortens economic cycles and amplifies market volatility.  Uncertainty dissuades investors from allocating capital and governments tend to create uncertainty – in the long-run – via bailouts, short-selling bans, and the implementation of other interventionist policies.  The volatility in the markets these past few days is testament to that fact.


To that end, today France, Italy, Spain and Belgium plan to enact bans on short selling or on short positions, which are only temporary and will do little to pacify the investment community or solve the structural problems that are impairing confidence.  Josh Steiner weighed in this morning, writing a note to his clients titled, “BANNING SHORT SELLING HELPS FOR ABOUT 5 HOURS”.  Steiner cites the short-lived bounce that occurred in US equity market, all of which was given back over the next seven trading days, when US authorities enacted a short selling ban in September of 2008.


As steep as the roller coaster in US equities has been (down ~13% over 14 days of trading), the government’s revisions of 1Q11 GDP has also been violent enough to cause whiplash; over thirty-five days, GDP for the first quarter was revised down 81%! 


Many investors today seem to be seeking a parallel to previous periods of market volatility.  Is this 1987 again or 2008 again? But how is it different?  One similarity between today and 2008 is that a major banking system is hanging by a thread.  Slowly, it is becoming evident that platitudes and assurances from Trichet and other banking officials in Europe are losing traction with global investors as the extent of the Old World’s problems become more apparent. 


One difference is that Europe is a far less united entity than the USA.  That’s not bluster, that’s a fact.  As mentioned in previous Early Look editions, conflict – not unity – has been a defining characteristic of the continent.  If the similarities between 2011 and 2008 are bad, the differences are almost worse!


Over the last three weeks the VIX is up 44.1%, 26.7% and 36.3% (through Thursday), respectfully.  As in 2008, the XLF has led the way in this downturn.  Brian Moynihan, CEO of Bank of America, is doing his best impression of Dick Fuld circa 2008, stating – in that wooden way that only corporate CEO’s can pull off – that “everything is fine”. 


Mr. Moynihan has assured interviewers that CDS spreads will go back down and instructed listeners of the company’s conference call to “trust” the management team.  The stock price has long been underperforming the market and the bank’s 5-year CDS spreads are currently 317 bps wide.  That’s 42% higher than the 2008 peak of 226 bps on 9/18/08 and 20% below the 3/30/09 peak of 402 bps.  These metrics are certainly not echoing Mr. Moynihan’s sentiments.  As Main Street America sees it, CEO’s and politicians are part of a separate group which they do not understand, do not trust, yet the actions undertaken by that group greatly influences the fortunes of the rest of the country.


Hedgeye’s Healthcare guru and general thought leader, Tom Tobin, wrote this week in his team’s morning “Healthcaster” note, “We made the point on the Debt Ceiling compromise that we would look back fondly on a process that has been roundly criticized and routinely blamed for recent stock volatility.”  Tom’s macro view has been on point lately and, rather than buying into the trap of seeing the passing of the debt ceiling resolution as cathartic, Tom was cognizant of the repercussions of the lack of transparency in CBO and ratings agency processes and heightening public emotions.  Observing this play out, Tom wrote, is “like watching two blind umpires argue a blown call.” 


Perhaps most disturbing is that “to construct its forecasts, the CBO reviews major econometric models and information from “commercial forecasting services” and also consults with and relies on the advice of its expert panel of economic advisers”, including academics and Goldman Sachs.


That’s right; the CBO bases its forecasts on the advice of Academia and Wall Street!  You couldn’t make this stuff up if you tried.  The logic is enough to make your head spin. 


The CBO uses street forecasts to peg their GDP forecasts which lead debt and deficit projections.  The Street uses federal spending to calculate its GDP forecasts.  Congress cutting spending leads to falling GDP, which leads to the Street cutting forecasts, which increases debt and deficit forecasts and increases the pressure to cut spending.  In the middle of this whirlwind is the consumer, who bears the brunt of the spending cuts and lack of jobs. Ultimately, the consumer is the linchpin holding the economy together.  70% of US GDP is consumption.  The very nature of the negative feedback loop I describe above is impairing a massive portion of our nation’s GDP from growing.


If you believe that our current political process is “broken”, as I do, the next step in the debt ceiling  debate will be no better than a made-for-TV reality show starring partisan politicians sitting on “The Super Committee” putting together back-door deals (based on flawed data) that will take us further down a path of financial morass. 


In the short run, we may get a reprieve from some of the Washington madness as Congress is on vacation for the balance of the month and the Obama family is going on vacation from the 18-28th.  The markets, like time, wait for nobody.  Not even the President.  Given the interconnected nature of global markets, with Europe facing a 2008 style financial meltdown - who is watching the store?


Again, some of the differences between 2008 and today seem worse than the similarities: joblessness is higher, more people are reliant on food stamps for sustenance, and the financial crisis threatening to wreak havoc on our economy is not here in the USA and therefore less within our government’s control.  The similarities, given that we are comparing the present situation to 2008, are inherently negative.  Gas prices are elevated, the VIX is spiking, stocks have fallen off a cliff, and consumer confidence is depressed. 


Collective Eureka moments dictate the larger trends in the market and Hedgeye has done a better-than-bad job of being ahead of the moves we have seen since our firm’s inception.  In 2008, we moved to cash (as high as 96%); in March and early April of 2009, we made some strong calls to buy US equities (buying SBUX in April).  Both of the market moves that ensued were long, pronounced, and driven not by any change in what market participants were seeing, but rather a change in how they were perceiving those factors and what they were thinking. 


We have observed a sea-change in how investors are thinking about this market, politics, the role of government, and earnings expectations in the past couple of weeks.  The Eureka moment is here.  Big government has brought around another crisis faster than almost anyone could have thought possible. 

How time flies.


Function in disaster; finish in style,


Howard Penney




THE EUREKA MOMENT - Virtual Portfolio


TODAY’S S&P 500 SET-UP - August 17, 2011


A “V-bottom” and low volume follow for 3 days does not a bottom make.  Bear market bottoms are processes, not points – and as long as the math in my multi-factor, multi-duration, model says sell, I’ll keep saying sell.  The number one question Keith has been getting is “when do you buy.” I think the Pain Trade has shifted to DOWN (as opposed to UP) and until the questions are ‘where do we stop selling’, Growth Slowing and Stagflation won’t be fully priced in.  As we look at today’s set up for the S&P 500, the range is 41 points or -1.66% downside to 1173 and 1.78% upside to 1214.




Yesterday was the 10th consecutive day where all 9 Sectors in the S&P Sector Model flashed bearish on both TRADE and TREND durations.  Remember, the S&P500 rallied off oversold lows last week but was still down week-over-week for the 3rd consecutive week. The 3 Sectors that continue to look the most bearish are the ones that fit our Macro Themes of Growth Slowing and Stagflation like a glove:

  1. Financials (XLF) – led yesterday’s decline (as they have since April) = down -18.9% YTD (we’re short XLF)
  2. Basic Materials (XLB) – look as bad as Dr. Copper is starting to look = down -10.4% YTD
  3. Industrials (XLI) – down another -1.4% today; buying cyclicals at a cyclical top has risk = down -9.9% YTD


THE HEDGEYE DAILY OUTLOOK - daily sector view

THE HEDGEYE DAILY OUTLOOK - global performance



  • ADVANCE/DECLINE LINE: -1525 (-4073)  
  • VOLUME: NYSE 1132.58 (+2.46%)
  • VIX:  32.85 +3.07% YTD PERFORMANCE: +85.07%
  • SPX PUT/CALL RATIO: 1.40 from 2.10 (-33.15%)



FIXED INCOME: Yield Spread (UST) continues to compress this morn (10s-2s = 204bps) = explicit signal that US Growth is still slowing.

  • TED SPREAD: 27.75
  • 3-MONTH T-BILL YIELD: 0.03%
  • 10-Year: 2.23 from 2.29    
  • YIELD CURVE: 2.03 from 2.10

MACRO DATA POINTS (Bloomberg Estimates):

  • 7 a.m.: MBA Mortgage Applications
  • 8:30 a.m.: Producer Price (MoM), Jul, est. 0.1%; prior -0.4%
  • 10:30 a.m.: DoE inventories
  • 11:30 a.m.: U.S. to sell $20b 12-day cash mgmt bills
  • 1:20 p.m.: Fed’s Fisher (Dallas) speaks in Texas


  • Dell said on call last night it saw some consumer demand weakness in June, moving into 3Q; cut year sales forecast. Watch Intel, Seagate, H-P stocks in supply chain
  • Merkel, Sarkozy rebuffed calls for joint euro borrowing to end debt crisis, saying greater economic integration needed first
  • President Obama continues his bus tour with town halls in Atkinson and Alpha, Illinois
  • Vice President Biden in Asia, stops in Beijing first



COMMODITIES: Dr. Copper remains broken from a Hedgeye TAIL perspective and we remain long Silver.


THE HEDGEYE DAILY OUTLOOK - daily commodity view



  • No Double-Dip Yet With U.S. Economy Punching Up Growth Figures
  • Singh Targets China’s 7 Days With $60 Billion: Freight Markets
  • Oil Climbs From Two-Day Low as U.S. Gasoline Inventories Decline
  • Record LNG Imports by India Signal Rising Prices: Energy Markets
  • Barclays’s Todd Edgar Said to Leave After 2 Years to Start Fund
  • Gold Gains for Third Day in London as Debt Concerns Spur Demand
  • Copper Rises as Chinese Buying Draws Down LME Inventories
  • Some Rare Earth Prices Will ’Collapse’ on Oversupply, Miner Says
  • Rio Tinto Halts 2 Pilbara Iron Ore Mines After Fatality
  • Woodside Profit Beats Analysts’ Estimates on Lower Oil Tax Bill
  • ENRC First-Half Profit Rises 29% on Higher Commodity Prices
  • Commodity Prices Being Driven by Supply Scarcity, Barclays Says
  • Wheat Rises for Third Day as Dryness May Reduce U.S. Seeding
  • Peppers Wilt as Barley Drowns for Farmers Who Can’t Tap Tax Aid
  • Copper Gains as Stockpiles Decline on China Buying: LME Preview
  • Milk-Powder Prices Tumble to 12-Month Low as Demand Ebbs
  • Commodity Traders’ $1 Million Bonus as Oil Doubles



THE HEDGEYE DAILY OUTLOOK - daily currency view



  • EUROPE: crashes in European Equities from YTD peaks: Italy -32%, France -28%, Spain -23%, Germany -21%
  • UK Jun ILO unemployment rate +7.9% vs consensus 7.7% and prior 7.7%
  • UK Jul claimant count unemployment change 37.1k vs consensus 20.0k and prior revised to 31.3k from 24.5k

THE HEDGEYE DAILY OUTLOOK - euro performance



  • ASIA: could have been worse overnight, but my signals say it will get a lot worse; particularly in Japanese and Korean stocks


THE HEDGEYE DAILY OUTLOOK - asia performance






Howard Penney

Managing Director


Keith shorted PNK in the Hedgeye Virtual Portfolio.  In addition to a lousy quantitative setup, PNK looks to be in a difficult spot in a deteriorating macro environment. 



Keith shorted PNK in the Hedgeye Virtual Portfolio at $12.49.  According to his model, TRADE resistance is only 2% above where he shorted it and TRADE support is 18% below.  While Keith is bearish on PNK from a technical perspective, the macro environment could cause some problems for PNK and investor sentiment surrounding the name.  If the Hedgeye macro view comes to fruition - stagflation - domestic gaming will come under pressure.  Gaming has proven to be an incredibly cyclical industry.  Sentiment could turn worse for PNK as it is the only domestic gaming company that is not in a deleveraging mode and not generating free cash flow.  That opens the stock up to a higher degree of multiple compression.




PNK has been a great story - we've been a big cheerleader - as management has done a terrific job with margin expansion.  With success, however, comes higher expectations.  Full year Street estimates are finally appearing reasonable rather than ridiculously low so the catalyst of continued quarterly blowouts may be behind the company (6 in a row).  With consumers struggling and 2H regional gaming trends already disappointing here in July, we struggle to find a positive catalyst.


Now, PNK had a pretty good july due in part to high table hold but domestic gaming revenue trends overall have already been disappointing.  As shown below, we estimate July gaming revenue in the mature regional gaming markets (aka riverboat markets) should decline slightly more than 1%.  We look at monthly sequential revenue based on the previous 3 months, adjusted by a historical seasonality factor.  Most of the riverboat states that have reported for July have posted same-store gaming revenues below our model, which would indicate sequential revenues have slowed.



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