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The Macau Metro Monitor, August 22, 2011




July CPI increased by 5.96% YoY and 0.51% MoM.  Price index of Recreation & Culture, and Transport rose by 0.94% and 0.85% MoM, respectively, with higher charges for outbound package tours, airfare prices, and ferry tickets.



CHART OF THE DAY: Uncertainty and Non-Linearity


CHART OF THE DAY: Uncertainty and Non-Linearity - Chart of the Day

Uncertainty and Non-Linearity

“Linearity isn’t the norm in the world around us, non-linearity is.”

-Dan Gardner


That’s another quote from the book I referenced last week that I am in the middle of reading – “Future Babble – Why Expert Predictions Fail and Why We Believe The Anyway.”


What’s interesting about both Chapter 2 (“The Unpredictable World”) and the book is that it’s really accessible for non-scientifically inclined readers. You don’t have to have a Ph.D. in fractal math or applied physics to grasp the deep simplicity of a few very important concepts – Uncertainty and Non-Linearity.


In Hedgeye’s Research and Risk Management Process, Uncertainty is critical to accept. Maybe that’s why our models have had very different signals than consensus during both the 2008 and 2011 Growth Slowdowns. Wall Street/Washington models tend to command some level of certainty in their baseline assumptions. Being absolutely certain about models that don’t work is a problem.


In the real-world of accountability, successful Buy-Side Risk Managers like Ray Dalio (Founder of $100B Bridgewater Associates) have embraced Uncertainty as a core component of what it is that they do. As Dalio says in John Cassidy’s New Yorker article (“Mastering The Machine”, July 25, 2011):


“I’m always trying to figure out my probability of knowing... Given that I am never sure, I don’t want to have any concentrated bets.”


I love that.


Defining Non-Linearity is a little more complex. But, essentially, that’s the point – and why we’ve built all of our models and processes on Complexity (or Chaos) Theory.


Clients often ask me for reading primers on Chaos Theory. Here are a few:

  1. Complexity – The Emerging Science At The Edge of Order and Chaos”, by M. Mitchell Waldrop
  2. Deep Simplicity – Bringing Order to Chaos and Complexity”, by John Gribbin

After having consumed both of these books, you’ll realize that neither contain any applied market models. And that, too, is the point. Accepting Uncertainty and Non-Linearity in your risk management process is something that you have to really come to embrace in principle before you apply it to what it is that you do.


In “Future Babble”, Gardner doesn’t do Chaos Theory like I do, per se, but he does simplify the difference between Linear and Non-Linear systems. “Gravity, for example, is linear in mass. Double the mass and you get twice the gravity” (page 39). “A common component of non-linear systems, feedback, involves some element of the system looping back on itself…” (page 40).


I like that explanation because it’s simple. To a degree, Non-Linearity also rhymes with what George Soros calls “reflexivity.” And, again, in principle, it takes a fundamental acceptance that this is what drives market prices, volumes, and volatilities before you can really apply it to what it is that you do.


Back to the Global Macro Grind


What it is that the US stock market continues to do is go down. Last week, with the SP500 closing at 1123 (its lowest weekly-closing-low of 2011), across all 3 of our core risk management durations (TRADE, TREND, and TAIL), US stocks are bearish/broken:

  1. TRADE (3 weeks or less): resistance = 1166
  2. TREND (3 months or more): resistance = 1294
  3. TAIL (3 years or less) = resistance 1256

When Perma-Bulls call this a correction, I’m not quite sure what they mean.

  1. Since its 2007 bull market cycle-high of 1565, the SP500 is down -28.2%
  2. Since its 2011 bear-market rally to a lower-long-term high of 1363, the SP500 is down -17.6%
  3. For 2011 YTD, the SP500 is down -10.7% (the Russell 2000 is down -16.8%)

Now before the bulls get to point #3 they’ll be jumping out of their seat saying, ‘but, the SP500 is still up +66.1% from its March 2009 closing low.’ OK. It really would be ok if the Perma-Bulls were in 100% Cash at the 2009 low and bought everything for their clients right then and there – but I’m pretty sure that didn’t happen.


In Q3 of 2008, I took the Hedgeye Asset Allocation Model to 96% Cash.


In Q3 of 2011, I’ve now taken the Hedgeye Asset Allocation Model to 70% Cash (versus 64% at the beginning of last week).


I guess that makes me relatively bullish compared to 2008!


Into Friday’s straight up move in Gold and Silver, I took our Commodities allocation back down to 0% (I sold our entire Silver (SLV) position). There are no rules against buying that or a long position in Gold back. Long-term returns are cumulative and gains compound. The market doesn’t particularly care what I own on any particular day.


Making money starts with not losing money. And while I am painfully aware of how hard it is to actually execute on that strategy at the end of bear market rallies (2007 and 2011), I’m also very respectful that long-term returns in this business are both Non-Linear and Uncertain.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, 79.84-84.69, and 1108-1166, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Uncertainty and Non-Linearity - Chart of the Day


Uncertainty and Non-Linearity - Virtual Portfolio

The Cavalier Cowboy

This note was originally published at 8am on August 17, 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 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




Notable macro data points, news items, and price action pertaining to the restaurant space.




International beef trade continues to be a big factor in this year's record cattle prices. During the first half of 2011, 10.3% of U.S. beef production was exported and imports equaled 8.1% of production. U.S. beef exports during June were up 19.6% while beef imports were down 16.7% compared to a year ago. The biggest foreign buyer of U.S. beef in June was Japan.




The Food Processors significantly underperformed last Friday as corn prices continued to rally.


This weekend’s Barron’s argues SAFM looks overpriced as it notes that high corn and soybean prices, low chicken prices, low chicken demand as well as an upcoming slack season could mean 25% downside. 






  • Coffee stocks (ex SBUX) underperformed the group, but on low volume.
  • Last week QSR stocks underperformed the S&P 500 last week by 180bps



  • TXRH outperformed as it announced a $50M increase in stock repurchase authorization
  • BWLD outperformed on positive comments from a broker
  • DRI - Olive Garden has rolled out its annual Never Ending Pasta Bowl limited-time offer for $8.95 this week.
  • Last week FSR stocks underperformed the S&P 500 by 240bps
  • Casual dining sales trends, as indicated by Malcolm Knapp’s Knapp-Track Casual Dining Sales Index, sequentially accelerated on a two-year average basis in July.  The better top line trends are not enough to offset the significant increase in commodity prices.  As a result EPS estimates are under continued pressure.








Howard Penney

Managing Director



Rory Green



Casual dining sales trends, as indicated by Malcolm Knapp’s Knapp-Track Casual Dining Sales Index, sequentially accelerated on a two-year average basis. 


Malcolm Knapp recently released estimated casual dining comparable restaurant sales for July.  The sales environment remained strong overall and, while we expect a slowdown in headline Knapp numbers deeper into the back half of the year, the trend in July sequentially improved from June. 


Estimated comparable restaurant sales growth in July was +1.4%.  Final June comparable restaurant sales growth was +2.6% (versus the prior estimate of +2.4%).  The sequential increase from June to July, in terms of the two-year average trend, was 25 basis points.


Comparable guest counts in the casual dining space grew +0.3% in July on a year-over-year basis.  The final June guest counts growth number was +0.8% (versus the prior estimate of +0.5%).  The sequential gain from June to July, in terms of the two-year trend, was 65 basis points.



Howard Penney

Managing Director


Rory Green


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