Give It Up

“There’s nobody taking center from me until I give it up.”

-Joe DiMaggio


That’s what Joltin’ Joe had to say about Mickey Mantle taking his position in center field for the New York Yankees in 1951. Mantle was the superstar rookie. DiMaggio was the tiring veteran. 1951 would be the last year Joe DiMaggio played center field.


That’s another quote from “The Last Boy – Mickey Mantle and The End of America’s Childhood” (Jane Leavy, page 15) and, like I do with every book I read, I dog eared the page, and wrote a personal note to myself beside the quote.


I write a lot because I like to think a lot. Writing helps me think. Whether it’s to all of you every morning or to myself in bed with my books every night – it’s just what I love to do.


Rather than rip into some tired Old Wall Street brain-trust that doesn’t want us to be successful this morning, I think my humble submission to you today should be a simple one. Be yourself. Play the game that you love. And enjoy what you do.


Thirteen years ago when I started in this business, it was my job. Ten years ago, it became a compensation mechanism to make enough money to not have to worry like many hard working and honest people do in this world.


Today, it’s not about the money. It’s about building something that I love; building something that’s successful; and building something that lasts.


I don’t doubt that Merrill Lynch founder Charles Merrill and Joe DiMaggio were some of the best players of their days. I respect their successes. I love celebrating winners wherever I can find them. But today, Merrill and DiMaggio are dead.


Today, Bank of America Merrill Lynch is setting up to fire another 10,000 people (WSJ). Today is a new day. Today is as good a time as any for Old Wall Street to Give It Up.


We need to rethink and rework this business. We need new leadership. We need to evolve. Fast. Or it will, once again, be too late.


Back to the Global Macro Grind…


Global stock markets around the world are crashing. Crash, as we defined it, is a peak-to-trough decline of 20% or more in the price of something that ticks in a short period of time. From Seoul, Korea to Frankfurt, Germany, here’s what’s really going on out there:

  1. KOSPI (Korea) = down -6.2% overnight and down -22% since May
  2. DAX (Germany) = down -3.5% this morning and down -28% since May
  3. CAC (France) = down -2% this morning and down -33% since February
  4. MIB (Italy) = down -2% this morning and down -37% since February
  5. XLF (US Financials) = down another -2% pre-open and down 28% since February
  6. XLI (US Industrials) = down another -1.5% pre-open and down 23% since April

Old Wall Street can blame Europe, blame China, or blame Canada at this point. Reality is that finger pointing is for losers and I, like most of you, am tired of watching it. It’s time for the Captains of American Accountability to step up and take charge. US Growth Slowing is as big a problem as any right now to this globally interconnected marketplace.


Need more US-centric leading indicators other than Financials and Industrials crashing?

  1. US CURRENCY – while the US Dollar isn’t crashing to all-time lows (yet), it’s getting pretty darn close. At $74.20 on the US Dollar Index, it’s only 3% away from its all-time lows that were established by 2 conflicted and compromised Federal Reserve Chiefs (Arthur Burns in the 1970s and Ben Bernanke, twice, since 2006).
  2. US TREASURIES – both 2 and 10-year US Treasury Yields are now collapsing/crashing to all-time lows. When compared to 2008 (the levels they just eclipsed on the downside), that’s saying something. And that something is not good.
  3. US JOBS and HOUSING – both sets of numbers yesterday (weekly jobless claims and Existing home sales for July) were bad enough in their own right. The bigger problem is expectations of how bad both jobs and housing numbers are setting up to look in August-September. Yes, these are Hedgeye forecasts – and yes, we have been right on both YTD.

I’m young, and I have plenty of character faults. I get that I have a lot to learn. But I can assure you that I am on it. I love this game. I love this country. And I think my team and I can help be the change we all want to see in our profession.


My immediate-term support and resistance ranges for Gold (immediate-term TRADE overbought this morning), Oil (we remain the bear on oil, Goldman the bull), and the SP500 (bearish) are now $1, $79.23-84.42, and 1106-1166, respectively. Our allocation to both US and European Equities in the Hedgeye Asset Allocation Model remains 0%.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Give It Up - Chart of the Day


Give It Up - Virtual Portfolio


Inflation in the grocery aisle continues to outstrip price increases at restaurants, the latest CPI data for July indicates.  It seems logical that restaurants may be gaining some benefit in terms of traffic as grocers have moved first (and aggressively) in hiking prices to protect margins.


From WMT’s commentary during its 8/16 earnings call, it seems that grocers’ customers are managing their checks quite closely: “While we saw an increase in grocery inflation of approximately 3.5% during the quarter, customers remain under continued pressure and are trading down to lower price points and smaller pack sizes, as well as opting out of discretionary purchases. As a result, we're seeing minimal pass-through of inflation to sales. Food inflation has replaced gasoline price as the most important household expense concern.”  Food inflation, according to WMT, has become the most important household expense concern.


The first chart below shows the significant difference between Food at Home CPI and Food Away From Home CPI.  The second chart shows the difference between the year-over-year growth of these respective indices and Core CPI growth.  The spread between Food Away From Home CPI growth and Core CPI growth has been fairly constant over the last few months.  The spread between Food at Home CPI growth and Core CPI growth, however, has been widening as suppliers and, in turn, grocers react to margin pressure. 







Howard Penney

Managing Director


Rory Green


GPS Quick Hit

The table below includes a variance analysis. The blue numbers are consensus numbers as they stand ahead of managment commentary. Overall, no major surprises in the quarter.


GPS Quick Hit - GPS top

GPS Quick Hit - GPS bottom




GPS Quick Hit - GPS sentiment

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.


Booking the gain at 8%



Keith covered PNK in the Hedgeye virtual portfolio at $11.52, netting a 8% gain on the short trade.  According to Keith's model, TRADE resistance has moved to $12.54, while TREND resistance is at $14.79.  It's great timing considering the release of Louisiana's state gaming revenues, which showed L'Auberge had an explosive July, +17% YoY in revenues.  But we believe the exuberance will be short-lived as regional gaming will have to deal with a difficult macro environment ahead.  We remain bearish on the intermediate-term TREND.  



Inflation? Deflation? Reflation? Nope, Jobless Stagflation

Conclusion: The economic data out today continues to support our key theme of Jobless Stagflation.  The inflation component should continue to keep the Fed in a box at least through year-end.


Positions: Long FLAT, SLV, LQD, FXC, and CAF; Short FXE, SHY, EWJ, and EWU.


Given the market action today, it is obviously not a day to pile on with bad news, but we do think it is important to synthesize some of the key economic data points out today and their prospective implications.  The theme of Jobless Stagflation is one we’ve been reiterating consistently over the past 9+ months.  As we review the economic data out today, this theme continues to be supported in spades.


Consumer price index – The all-items CPI index came in at +3.6% on a year-over-year basis.  The primary positive contributor, not surprisingly, was fuel oil up +37.2% in price year-over-year.  Interestingly, the most significant negative contributor was utility gas service, which was down -2.8% on a year-over-year basis.  This is the third month in a row that all-items CPI has increased 3.6% year-over-year, which is the highest level since November 2008.


The Federal Reserve tends to focus on CPI ex-food and energy, due to the purported transitory nature of commodity prices.  On this basis, CPI is still accelerating and came in at 1.8% for the month of July.  Further, CPI ex-food and energy has been accelerating since a 0.6% print in October 2010 and is now back to levels not seen since December 2009.

In aggregate, CPI readings should continue to keep the Federal Reserve in a box as it relates to implementing incremental easing.  Further, comparisons for CPI are relatively easy through the end of 2011, which will likely keep CPI at elevated levels.


Inflation?  Deflation?  Reflation?  Nope, Jobless Stagflation - 1


Jobless claims – The jobless claim number of 408K today was not a disaster per se, but did come in above the critical 400K line and accelerated from the prior week’s reading of 399K.  Above 400K, based on the math, the unemployment rate will not approve.  Since the beginning of April, we have seen only two weeks with jobless claims below 400K, which highlights the structural and sticky nature of the domestic unemployment picture.


Prospectively, we expect the employment picture in the U.S. to deteriorate based on a number leading indicators.  One key leading indicator that our Financials Team flagged today is Challenger Announced Job Cuts, which jumped 59% year-over-year in July to 66.4K. This is an 18-month high and should be reflected in government reported numbers in the coming weeks.  Another interesting leading indicator is sentiment, which is reflected in manufacturing surveys as highlighted in the Philadelphia Fed Factory Index today, and touched on below.


Inflation?  Deflation?  Reflation?  Nope, Jobless Stagflation - 2


Philly Fed survey – To say today’s Philadelphia Fed’s Factory index survey was a bomb would be an understatement.  The index dropped to -30.7 from +3.2 the month before, and came in well below the consensus economists’ expectations of +3.7.   This was the largest month-over-month drop since October 2008, which was in the midst of the financial crisis.   Some of the key components of the survey to highlight include: new orders falling to -26.8 from +0.1 and the gauge of the number of employees falling from +8.8 to -5.2.


Obviously all economic indicators are correlated on some level, but in the chart below we compared Philly Fed Survey to monthly nonfarm payrolls.  Not surprisingly, as the chart below shows, the two series of data are correlated.   In the table below, we looked at the more direct correlation, so when the Philly Fed hits -20 for the first time in a cycle, what does that imply for nonfarm payrolls in the next month?  As the table shows, when nonfarm payrolls hit -20 for the first time in a series (a positive number would reset the series), on average the next month of nonfarm payrolls is -71.4.


Inflation?  Deflation?  Reflation?  Nope, Jobless Stagflation - 3


Obviously, much of this data is priced with the market action today, but collectively the data continues to support the Jobless Stagflation theme. 


Daryl G. Jones

Director of Research


Inflation?  Deflation?  Reflation?  Nope, Jobless Stagflation - 4