TIF: Quick Take

Crusher number. But hindsight matters not. Things are turning down for the high end consumer in 4Q.


Big number from TIF, even though we think a cleaner number is $0.04 below the ‘adjusted’ print of $0.86 (a truer number is $0.70 due to $0.16 of HQ costs – but that was stripped out of expectations). The driver here was clearly in comps, which were up sequentially in every region sans Europe (where they still printed a healthy 11%. 2-year comps remain healthy, and accelerated meaningfully in Japan, which was the biggest surprise. The SIGMA chart swung to the upper right, which marks one of the few companies to do so this quarter. All-in, it looks quite healthy at face value.


BUT, and there’s a big but, this is all backward looking. We feel strongly that we’ve not only seen a meaningful slowdown in high end spending in August, but have also seen inventory of diamonds and gold backing up in the supply chain. Maybe TIF is strong enough to delay this for quarters past their competition, but all it can do is kick the can down the road. The inevitable will come it’s way.


It should be an interesting call.


We’ll be back w any relevant info after the 8:30 call.


TIF: Quick Take   - TIF SIGMA 8 11


TIF: Quick Take   - TIF QH Top 8 11

TIF: Quick Take   - TIF QH Bottom 8 11

Are We Human?

This note was originally published at 8am on August 23, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Are we human, or are we dancer?”

-The Killers


As many of you likely know, “Human” is a song by American Indie rock band The Killers.  Keith referenced it in Hedgeye’s last company meeting to note the infallibility of us all.  Sometimes we are right, sometimes we are wrong, but we are always human.  As well, sometimes things just aren’t as complicated as humans like to make them.


While I am prone to typos, the typo, or rather grammatical error, is not my doing in this instance.  The Killers actually wrote the song with dancer, and not dancers.  In fact, the song was motivated by a derogatory comment by Hunter S. Thompson, when he stated that America was raising a “generation of dancers”.  According to Wikipedia, in an interview in Rolling Stone, the lead singer of The Killers, Brandon Flowers, was asked about confusion over the lyric and responded:


“It’s supposed to be a dance song, the beat goes with the chorus . . . if you can’t put that together, you’re an idiot.  I just don’t get why there’s confusion.”


Certainly, Brandon Flowers and his band mates are human, but grammatical error and all, their song, “Human”, was voted the top song of 2008 by Rolling Stone Magazine.


The investment business is perhaps one of the most humbling of all professions and reminds its participants every day that they are human.  In the Chart of the Day, we show the SP500 versus 10-year Treasuries over the last six months.  Certainly, there were very few investors on the right side of both trades six months ago.


This morning I went back to our Early Look strategy note from exactly six months ago and on February 23rd, Keith wrote:


“And this is really where I can look myself in the mirror and say, despite the fierce lobbying for me to chase US stock market fund “flows” into their mid-February crescendo, I stayed true to the best top-down risk management process I know – when Global Inflation Is Accelerating, and Global Growth Is Slowing, it’s time to build up a large asset allocation to Cash.”


At that point, the SP500 had been chugging upwards since the start of the year and was up roughly 4% year-to-date and on trajectory for a more than 25% annualized return.  Back then, it was hard to be bearish, now it is pretty easy.


Akin to The Killers song, we aren’t bears, we aren’t bulls, we are only human.  While Keith, myself, and our team are happy that our research process helped us alert our clients early to the confluence of global economic issues that has led to the dramatic decline in global equities year-to-date, the next challenge is to have the correct view of the next major move in global equity markets. 


For us to turn more positive on U.S. economic growth we would likely need to see a positive change on the margin in three key areas: housing, employment, and debt.  It is really that simple.  The first two relate to the largest portion of the U.S. economy, which is consumer spending.  Stable house prices provide consumers the confidence to spend, and fuller employment broadens U.S. consumption.  The third factor, debt, relates to the U.S. government balance sheet.  Just like any corporate or individual balance sheet, the federal balance sheet has become constrained by debt, which will impede future organic growth.


Underscoring all of this, as it relates to securities prices, is, of course, the perspective of expectations.  That is, what is priced in?  With the SP500 now down more than 10% in the year-to-date, there is certainly a reasonable amount of bad news priced in.   Often, though, securities prices tend to be a leading indicator versus a lagging indicator and a key question to consider now is what the dramatic decline in equity prices we have seen in the last month means for confidence and economic growth over the coming quarters.


A couple of days ago, President Obama stated that he doesn’t expect a recession in the next twelve months.  This was supported this morning by a survey from the Associated Press that indicated that a majority of economists believe that another recession is unlikely in the next twelve months.  This is, of course, the same group of economists whose group GDP growth estimate for 2011 was +3.2% on February 23rd. . .


Flagging our competitors on their errors in groupthink only gets us so far, but looking at the consensus view does provide us some insight into what is priced into the market.  That said, we certainly understand, as former Yale President and Commissioner of Major League Baseball Bartlett Giamatti famously said:


“No one man is superior to the game.”


Isn’t that the truth . . .


Keep your head up and stick on the ice,



Daryl G. Jones

Director of Research


Are We Human? - Chart of the Day


Are We Human? - Virtual Portfolio

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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.




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


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