The Club

“Stop fighting us and play ball.”

-The Club (1998)


I am writing this morning’s Early Look from my favorite place on earth – from my office on Lake Superior.


There are no central planners here. There are no Keynesians. There is no one who can even attempt to give me a wink and a nod as to what today’s speech from the Almighty Federal Reserve Chairman may bring…


And I like that. I don’t ever aspire to ever be in the area code of The Washington/Wall Street Club.


Any pro who has played this game for real knows what The Club is all about. It can make you laugh. It can make you cry. It’s where a good ole boy by the name of Warren Buffett gets his wheels greased. It’s where former Fed Heads whisper sweet nothings into privileged ears. It’s where the heart of most of America’s leadership and credibility problems in global financial markets resides.


The aforementioned quote comes from a Complexity Theorist by the name of Martin A. Armstrong. Like me, he has his own models that include fractal math. Like me, his macro forecasts are better than the government’s. Unlike me, he went to jail.


Whether or not he was innocent of alleged Japanese bond fraud isn’t the point of this morning’s note. The point is about The Club. If you’ve studied economic history as closely as I have, you’ll at a bare minimum respect not only the generational contributions Armstrong has made to the risk management field, but also his tabulation of the history of The Club’s market manipulations.


“On February 4th, 1998, Warren E. Buffett was forced to come out and state that he purchased in London $910 million worth of silver. Buffett added: “Berkshire has no knowledge of the actions or positions of any other market participant…” (Martin A. Armstrong)


Right Mr. Buffett. You and Mr. Sokol never know anything about nothing. Right.


According to Armstrong, after the Buffett disclosure, the then journalistically relevant WSJ called demanding an answer: “How did you know”? (as in how did you know the large premium price paid for Silver in London instead of buying it cheaper in New York during the silver panic was Buffett’s order before it was news?). Armstrong replied, “It was my job to know!”


Indeed, Mr. Armstrong. Indeed. It is our job to know that someone always knows something.


Who knew Warren Buffett was going to get another sweetheart deal on Bank of America before it was announced yesterday morning? Was the stock up +11% the day prior on huge volume by happenstance? Or did someone in The Club know?


If you didn’t know this is how Old Wall Street operates, now you know…


Back to the Global Macro Grind


Despite Buffett making an investment that puts him in a preferred position ahead of every single common stock holder in BAC, the US Financials ETF (XLF) closed down on the day yesterday. For 2011 YTD, the Financials are now down -20.63%. Since their YTD hopeful highs established in February 2011, the Financials have once again crashed (down -26.1% since FEB 17).


If you were carrying some orange jump suit risk into the day (long the Financials on the pending “news” at the open), you couldn’t have been happy with the day’s ultimate outcome. I guess The Club’s perpetually preferred returns aren’t what they used to be.


Ahead of The Club’s next move in Jackson Hole today, here are some other globally interconnected realities associated with a global market place that doesn’t trade on what Joe Kennedy’s friends know anymore:

  1. US stocks (SP500) = down -15.0% since Bernanke’s 1stever Global Press Conference on Money Printing (April 2011)
  2. German stocks (DAX) = down hard this morning (-1.8%) and continue to crash (down -27% since late April)
  3. Greek stocks (Athex Index) = gone – down another -1.2% this morning and down -48% from their 2011 high
  4. UK Stagflation = reported this morning with Q211 GDP growth only 0.7% y/y and headline inflation running at +4.4% y/y
  5. US Stagflation = to be reported at 830AM EST (ie GDP somewhere around 1%, but subject to 81% downside revisions)
  6. Gold = rallies, big time, off of the Hedgeye TRADE line of support that we gave you yesterday ($1705/oz)

To a large extent, Gold’s 2011 performance reflects a repudiation of Keynesian Economics. The Club’s heavy hand of Big Government Intervention in financial markets is running out of bullets.


The People of the United States of America don’t like ZERO percent interest rates of return on their hard earning savings accounts inasmuch as they don’t like being gamed by an old man giving Bank of America a buzz from his bathtub.


Americans want Transparency, Accountability, and Trust.


Armstrong’s open attacks on The Club probably have something to do with him being put in the slammer. So I better end my morning missive here today or plan on being in Thunder Bay, Ontario for an extended stay.


Armstrong’s view is that “the Crash of 2007 has been an accumulation of this trend that finds coordinated trading to seek that guaranteed perfect riskless trade with political backing…”


Before we get all warmed up by Buffett’s storytelling that Bank of America has a “great management team” and whatever else he had to say yesterday to get printed on his preferreds – just remember Buffett’s #1 reason for buying the same preferred stock position in Goldman Sachs in 2008. He said it was because he knew his old boys in Washington would bail them out.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $81.21-85.20, and 1107-1182, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Club - Chart of the Day


The Club - Virtual Portfolio


The Macau Metro Monitor, August 26, 2011




In June, the average earnings of full-time employees in the gaming sector stood at MOP16,460 (US$2,058), up by 7.0% YoY.  At the end of 2Q 2011, the gaming sector had 47,300 employees, up by 7.9% YoY.  By end-June, the number of vacancies in the gaming sector reached 2,142.



In July, the total number of non-resident workers in Macau stood at 87,100, up by 2.2% MoM.  The gaming sector employed around 11,600 imported workers, including almost 3,500 construction workers.

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TODAY’S S&P 500 SET-UP - August 26, 2011


Both the US and the UK will remind the world what modern day Jobless Stagflation looks like this morning. This is not 2008. It’s 2011.  The UK printed their Q211 GDP at 0.7% y/y this morning and the US should come in wherever they make up the number (subject to 81% downside revision); headline inflation in both the US and UK will continue to run 5-10x real-GDP growth; markets have paid (and are paying) lower multiples for GDP slowing down hard (stag) and sticky/lagging/higher costs (flation)


As we look at today’s set up for the S&P 500, the range is 75 points or -4.51% downside to 1107 and 1.96% upside to 1182.









  • ADVANCE/DECLINE LINE: -1584 (-2757)  
  • VOLUME: NYSE 1209.19 (+8.99%)
  • VIX:  39.76 +10.75% YTD PERFORMANCE: +124.00%
  • SPX PUT/CALL RATIO: 1.72 from 1.73 -0.12%



  • TED SPREAD: 32.41
  • 3-MONTH T-BILL YIELD: 0.01% -0.01%
  • 10-Year: 2.23 from 2.29    
  • YIELD CURVE: 2.01 from 2.06

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: GDP, QoQ Annualized: est. 1.1%, prior 1.3%
  • 8:30 a.m.: Personal consumption, est. 0.2%, prior 0.1%
  • 9:55 a.m.: UMich Confidence, Aug. final, est. 55.8, prior 54.9
  • 2 p.m.: USDA cattle, hog slaughter



  • Bernanke speaks at 10 a.m. in Jackson Hole, Wyoming
  • Short-selling bans extended in France, Spain, Italy amid stock volatility
  • Japan Prime Minister Naoto Kan’s terms for resignation met with passage of bills
  • General Electric (GE); expects Latin America sales to double in next 3 or 4 years
  • Goldman Starts Internal Probe on Twitter Leaks: N.Y. Post



  • COMMODITIES: Gold holds the Hedgeye TRADE lines of support (1705) like a champ - new trading range is now 1.





  • U.S. Northeast Braces for Worst Hurricane Threat Since 1985
  • Glencore, Rio Speed Partner Deals After Stock Declines
  • German Nuclear Exit May End French Power Premium: Energy Marke
  • Gold Gain Cuts Weekly Drop as Stocks Fall Before Bernanke Speech
  • Oil Trims Weekly Gain on Concern of Slower U.S. Economic Growth
  • Gold May Slump 30% as Dollar ‘Outperforms,’ Aegis Capital Says
  • Crises Send U.S. Wheat Exports to 18-Year High: Chart of the Day
  • Copper Trims First Weekly Gain in Four Ahead of Bernanke Speech
  • Iron Ore Climbs to Three-Month High as China Boosts Stockpiles
  • Societe Generale Hires Haigh as Head of Commodities Research
  • Oil May Fall as Libya Rebels Move to Resume Output, Survey Show







  • The EUROPEAN train wreck continues!
  • Greece is gone!
  • GERMANY – Germany leading Europe on the down days now and that’s just not good; down another -1.7% here this morn and crashing (down -27% since May) to lower-lows; there is no catalyst (and it’s probably a bearish one) until mid-late SEP in Europe when 27 political countries arm wrestle on the EFSF
  • Germany Jul import prices +7.5% y/y vs consensus +7.0%, priior +6.5%
  • UK Q2 GDP +0.7% y/y vs preliminary +0.7%; +0.2% q/q vs preliminary +0.2%




  • ASIA: very much mixed overnight with China down 12bps, Singapore -0.6%, India -1.4%, KOSPI +0.8% and Thailand +0.87%.
  • Japan July core CPI +0.1% y/y vs cons (0.1%). Tokyo August core CPI (0.2%) y/y vs cons (0.1%).








Howard Penney

Managing Director


Chipotle’s same-store sales have been impressive with the company posting double-digit growth for the last four quarters.  Most of this growth has been driven by traffic gains.  Late in the first quarter, however, the company implemented a price increase in its Pacific region, which accounted for 1.5% of CMG’s 2Q11 10% comp.  After three years of nearly no menu price increases outside of this recent pricing in the Pacific, management decided to implement a 4.5% price increase on average across about 80% of its restaurants.  Management started to roll out this pricing during the third week of June and expects it to be fully implemented by the end of August, resulting in a 3.5% increase during the fourth quarter.  Due to the timing of the increase, the company expects to realize about two-thirds of the menu price increase during the third quarter. 


Although management commented during its second quarter earnings call that they had not yet “seen any evidence of customer resistance” from the recent price increases, I would not be surprised to see traffic trends fall off slightly on a two-year average basis, particularly in this current environment.  Either way, the traffic comparisons get increasingly more difficult over the next few quarters on a one-year basis.  It is important to remember that CMG’s traffic trends turned negative in late 2008 into 2009 when the company rolled out an incremental 6% price increase.  The macro environment was partly to blame at that time, but CMG’s traffic trends did not turn positive again until it fully lapped this price increase in 4Q09.


The magnitude of the company’s current price increase is not as great as the prior increase and recent traffic trends have surprised to the upside, but this price increase is coming at the same time the company’s traffic comparisons get increasingly more difficult.  That being said, I would not be surprised to see CMG’s traffic growth decelerate to a low single digit rate by the fourth quarter after growing by closer to low double digits for the last four quarters. 


On a same-store sales basis, I am currently modeling an 8.3% comp for the third quarter, which assumes a 30 bp acceleration in two-year average trends as I am expecting higher pricing to offset the slight deceleration in traffic trends.  In the fourth quarter, my 6.5% comp estimate assumes two-year average trends decelerate slightly, largely as a result of a fall off in two-year average traffic trends.


In 3Q11, the consensus has bakes in a sequential acceleration in revenue growth, which will be difficult to achieve.  As a result of a more conservative top line trends, our EPS estimates are $0.04 below the street.  



Chinese Cowboys Intact

Conclusion: If you have to be long something equity-related, we continue to side with the market and stand by our view that Chinese equities are your best bet on a relative basis. As China begins to fire up more strategic growth initiatives, we expect the delta in performance between Chinese shares and U.S./E.U. shares to widen even more dramatically that what we’ve already seen over the last few months.


Position: Long Chinese equities (CAF).


At Hedgeye we place a significant emphasis on timing and duration in both our research and risk management (expression of said research). From a timing perspective, our signal to buy Chinese equities on June 16thhasn’t been our best call on an absolute basis (the CAF is -2.2% against us in our Virtual Portfolio).  On a relative basis however, the Shanghai Composite Index has held up marvelously amid the recent global sell-off in equities:


Chinese Cowboys Intact - 1


A recent mainstay on our Hedgeye Alpha (a daily compendium of our firm’s 12 best L/S ideas), our Chinese Cowboys thesis continues gain traction as the research supporting the call  comes in as expected: 

  1. Real economic growth basing;
  2. Inflation is peaking; and
  3. Rate hikes stop and central bank becomes dovish on the margin

As we have said many times throughout our bullish bias on Chinese equities, we’re not calling for a reacceleration in Chinese economic growth. We’re merely calling for it to slow at a decelerating rate over the intermediate term – rather than fall off a cliff as the May/June China-bears wrongfully believed.


Over the last few weeks, we’ve received some (slight) bullish catalysts that we think are worth compiling: 

  • The State Council reported that Chinese officials intend for the construction of 10 million units of low-income housing to have begun by the end of November (as part of a larger initiative to build 36 million by 2015). We’re not big on China’s current “build it and they will come” growth model, but we can’t deny the impact of such a large-scale initiative will likely have on the Chinese economy over the intermediate term (~48% of GDP is Fixed Asset Investment).
  • China’s Finance Ministry drafted a preliminary plan that would allow the country’s municipal governments to issue bonds to investors. This is helpful because it would allow cash-strapped local government financing vehicles to smooth out their liabilities over a longer duration vs. the current credit structure consisting of ~80% bank loans and ~70% of the aggregate debt burden coming due in over the next five years. A successful follow-through of this plan removes major TAIL risk from the Chinese banking system.
  • The National People’s Congress recently finalized revisions to the personal income tax law, raising the minimum income tax threshold +75% to 3,500 yuan and also lowering the mill rate for lowest taxable income bracket. The former maneuver is expected to exempt an incremental 60 million Chinese consumers from paying income taxes. The changes take effect at the start of next month and we expect it to be incrementally bullish for Chinese consumption growth, which is already being buoyed by per capita disposable income growth accelerating to +14.1% YoY in 2Q.
  • The absence of tightening: China has held off from raising interest rates and banks’ reserve requirement ratios since July 5thand June 20th, respectively, with the latter hold being the longest in the current tightening cycle (beginning in Jan. ’10) since China held RRR’s flat from May through November of last year. The lack of tightening and shift in bank expectations away from further hawkishness has facilitated a -108bps peak-to-current decline in 3mo Shibor, an aggregated measure of interbank funding costs out of the National Interbank Funding Center in Shanghai. As banks start to pay less and less for funding, we expect the current credit crunch hampering the operations of many small-to-medium-sized enterprises to recede on the margin. This is a big deal, as SMEs employ ~80% of Chinese workers, generate 2/3rds of industrial output, and pay half of all tax revenues per China’s Ministry of Industry and Information Technology.
  • Perhaps the largest (and most speculative) bullish catalyst we could potentially see in the next 3-6 months is a widespread relaxation of fiscal spending and a broad easing of monetary policy in “some sectors”, as reported today by the China Securities Journal. Though largely an unsubstantiated rumor at this point, it is an important catalyst to keep an eye out for over the coming months – especially as our calls for Slowing Global Growth and Deflating the Inflation continue to play out in spades. 

Chinese Cowboys Intact - 2


Chinese Cowboys Intact - 3


All told, we continue to like Chinese financial and consumer stocks as China begins to fire up more strategic growth initiatives favoring these sectors. This will likely come at a time when developed markets, such as the U.S., have little to no bullets left on the monetary policy front and no headroom left at all on the fiscal front to attempt to stimulate growth. In such an event, we expect the delta in performance between Chinese shares and U.S./E.U. shares to widen even more dramatically that what we’ve already seen over the last few months.


Chinese Cowboys Intact - 4


We realize that it’s difficult for the Chinese economy to hum along while global growth slows broadly – especially considering weakness in important economies like the U.S., Japan, Germany, France, U.K., Brazil, etc. That said, however, if you have to be long something equity-related, we continue to side with the market and stand by our view that Chinese equities are your best bet on a relative basis.


Darius Dale


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