Contemplating Inevitabilities

“Old age is a shipwreck.”

-Charles de Gaulle


In life, there are certain inevitabilities, with aging at the top of the list.  No amount of money, fame, or religion prevents the reality that we will all grow old, at least physically, one day.  While in his quote above de Gaulle could easily have been talking about the fiscal discipline of Greece, he was, in fact, appropriately describing the reality of our bodies naturally aging and eventually deteriorating.


Now that I’ve started your morning off on a completely somber note, I’ll offer another reality, which is that aging and longevity research suggests that all of our life spans will be extended versus prior generations.  Not only that, we will age more gracefully and comfortably as well.  In her new book, “100+ : How The Coming Age of Longevity Will Change Everything, From Careers And Relationships To Family and Faith”, Sonia Arrison, a fellow Canadian and senior researcher at the Pacific Research Institute, provides an insightful overview of the technology of longevity.


In fact, as Arrison notes, human life has generally been extending since human life began.  During the Cro-Magnon era, humans could have expected to live just long enough to graduate from high school, or to the ripe old age of eighteen.  By the time of the European Renaissance life expectancy had almost doubled to thirty.   By 1850, just as the U.S. population hit 23.1 million, the average age reached forty-three.   Today, with the acceleration of medical breakthroughs, the average person in the Western world can expect to celebrate his, or her, eightieth birthday.  In the future, according to Arrison:


“The first person to live to 150 years has probably already been born.”


The pursuit of longevity has been ongoing since the beginning of recorded history.  One of the first contemplations of death actually occurs in Genesis, the first book of the bible.  After willfully disobeying God by eating the forbidden from the Tree of Knowledge of good and evil, Adam and Eve were kicked out of the Garden of Eden, a place of immortality, into the real world where they faced sickness, death, and the threat of crazy New York taxi cab drivers.


I don’t need to restate the entire history of human aging to assure you that it is a topic that has been and likely always will be front and center for mankind.  As a result, a vibrant growth industry has risen around areas of extending lives and more gracefully aging.  In her book, Arrison discuss some of the key areas of development and investment, which we’ve borrowed and outlined in the table below:


Contemplating Inevitabilities - 1. DJ


The key question that arises of any discussion of the extension of human life is whether the earth has the physical resources to support a growing population.  Obviously, an important question given that human population has grown from 900 million in 1800 to just under 7 billion people today.  The most famous critic of the earth’s ability to sustain population growth is Thomas Malthus, who in 1798 wrote in his “Essay on the Principle of Population”:


“Population, when unchecked, goes on doubling itself every 25 years, or increases in a geometrical ratio.”


Interestingly, Malthus’ thesis ended up being spot on for the growth of the earth’s population.  Where Malthus ultimately failed was in his belief that subsistence could only grow arithmetically, which, according to his theories, would create a major issue in the future as there wouldn’t be enough resources to support the population.


Long term commodities bulls are obviously major advocates of Malthusian theories, as they describe a natural tightening of supply and demand for food, energy, and building materials. Ultimately this supply and demand will lead, according to commodity bulls, to long term favorable real price performance for commodities and impending disaster for those humans who can’t afford the accelerating price of commodities.


This is an interesting theory, but it hasn’t really played out in practice.  The most prominent modern advocate of Malthusian theories is Stanford professor Paul Ehrlich, author of “The Population Bomb”.  In the 1970s, he predicted that the world would run out of food (it didn’t) and in 1980 bet Julian Simon that over the next ten years, five specific metals would increase in price. So, what was the outcome?  As Arrrison writes:


“During the decade from 1980 to 1990, world population grew more than 800 million – a huge increase that, according to Ehrlich, should have spelled disaster . . .  Without fail, every single metal decreased in price, and Ehrlich was forced to admit defeat.”


The moral of the story is that even as the population has grown geometrically, humans have continued to innovate, live longer and healthier, and decreased their dependence on finite resources.  (Incidentally, as shown in the Chart of the Day, the decade from 1980 to 1990 was also a period in which the U.S. dollar was flat (albeit with huge strengthening in between), versus trending down thereafter, which likely served to keep commodity inflation in check.)


So, as you head into the long weekend contemplating your longevity, I’ll offer a few tips.  To start with, there does appear to be some credence to the health benefits of red wine, especially for those who are a little overweight, but the single and simplest tip to living a long and healthy life . . . . caloric restriction. Not sexy, but eating less works.


Enjoy the long weekend with your friends and families.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Contemplating Inevitabilities - Chart of the Day


Contemplating Inevitabilities - Virtual Portfolio

Feeling Good

This note was originally published at 8am on August 30, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Feeling good about a judgment is a prerequisite to acting upon it.”

-Dan Gardner (Future Babble, 2010)


I moved the Hedgeye Portfolio to net short (more shorts than longs) for the first time since June 23rd yesterday.


Did I feel good about it? Did I feel as good as I felt about running net short in June of 2011? How good did I feel moving to one of my most net long positions (more longs than shorts) on August 8th, 2011?


The answers to these questions are uncertain. I never feel good about any position until it’s working. And there is usually a huge difference between what I am feeling versus what I am actually doing with my longs and shorts.


“Confirmation bias” is a term that was coined by cognitive psychologist and Master Chess player, Peter Wason, in the 1960s. Per Wikipedia, the simple definition of confirmation bias is the “tendency for people to favor information that confirms their preconceptions or hypotheses regardless of whether the information is true.”


Confirmation bias, as Dan Gardner astutely calls out on page 84 of “Future Babble – Why Expert Predictions Fail and Why We Believe Them Anyway”, “is as simple as it is dangerous.” As Global Macro Risk Managers, we need to be thinking long and hard about that.


“In Peter Wason’s seminal experiment, he provided people with feedback so that when they sought out confirming evidence and came to a false conclusion, they were told clearly and unmistakably, that it was incorrect. Then they were asked to try again. Incredibly, half of those who had been told their belief was false continued to search for confirmation that it was right.” (Future Babble, page 85)


Can you imagine if Wason’s sample study was today’s short-term performance chasing hedge fund community? Never mind half – that number would be a lot higher than 50%. After all, we hedge fund people were born on this good earth to be able to judge sales, margins, and “valuations” light-years beyond our contemporaries who are still caged up in the Bronx Zoo.


Back to the Global Macro Grind


While I was right in my call for a “Short Covering Opportunity” (time stamped 10:47AM August 8th, 2011) in early August, I was wrong last week in suggesting that the SP500 could breakdown to lower-YTD-lows.


Being wrong happens. Most people just don’t like to admit it does. The key in this profession is being right a lot more than you are wrong. And not being really wrong when you aren’t right.


When I decided to move the Hedgeye Portfolio to net short yesterday, it was a conscious decision based on my multi-factor, multi-duration, Global Macro Model – not solely on what the SP500 was doing.


That’s not to say what the SP500 is doing doesn’t matter. What it has been doing does too (SP500 returns):

  1. DOWN -22.7% from its October 2007 top
  2. DOWN -11.2% from its lower-long-term high established in April 2011
  3. UP +8.1% from its higher-immediate-term low established in August 2011

Now a Perma-Bull will quickly snort … but but but, “we’re up huge from the 2009 low.” And we all get where that is coming from – what the bull means is that the US stock market is up +78% from the 2009 low. His client’s money isn’t.


Math doesn’t uphold the principles of storytelling or confirmation bias:

  1. The SP500 lost 57% from October 2007 to March of 2009
  2. In order to “break even” on that loss, your buy-the-dip bull would need to be up +131% off the bottom
  3. That, of course, assumes he nailed every move along the way (for 3 years)

So when the manic media is hammering you with “Greek stocks are having their best day ever” yesterday (they did on a percentage basis), remember that on Friday Greek stocks had crashed (down -48% since February 2011) and they’d need to “rally” +92% “off the lows” to get you back to break even versus only 6 months ago.


Or how about Bank of America? How good am I “feeling” about shorting that stock again yesterday in the Hedgeye Portfolio?

  1. Early September 2010 when we were shorting BAC, the stock was at $13.21
  2. By August 23, 2011, BAC had lost 52% of its “value” in less than a year
  3. BAC needs to rally +110% “off the lows” to get back to a 1 year break even return

I didn’t feel good about shorting BAC yesterday. I felt as uncertain as I should feel when a short position is -11.28% against me. While our Financials Managing Director, Josh Steiner, and I have shorted this stock 10x since 2010 (and been right 10x), that and a case of Molson Canadians will maybe make us prolific horseshoe players down at the lake tonight – nothing more.


If I was being paid what I used to be overpaid working at hedge funds and I said that in a morning meeting, everyone who wanted me to fail would be whispering “uh, it doesn’t sound like Keith has conviction anymore does it”…


That’s Wall Street. They want everyone to be “Feeling Good” about their “best ideas”, all of the time.


My immediate-term TRADE ranges of support and resistance for Gold, Oil, and the SP500 are now $1733-1817, $85.03-88.62, and 1163-1219, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Feeling Good - Chart of the Day


Feeling Good - Virtual Portfolio


The Macau Metro Monitor, September 2, 2011




According to preliminary information compiled by Macau Business, here are the August GGR share numbers—SJM: 27%, GALAXY: 20%, MPEL: just less than 15%, LVS: above 14%, WYNN: 13%, and MGM: 11%.



Private equity firm Permira has raised HK$4.78 BN (US$613 MM) by selling 6.5% of its stake in GALAXY at a price of HK$17.70 per share.  The deal reduced Permira’s stake in the company to 12.8% from 19.3%.


“We are confident of further appreciation in the value of the company and the investment. As such, the Permira funds currently have no immediate plan to dispose of further shares in the company and intend to continue to hold the remaining shares as long-term investment,” Permira said.

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.

Eye On Brazilian Policy: “Oh No You Didn’t”

Conclusion: We view the central bank’s aggressive and proactive rate cut as supportive of Brazilian equities because it will likely coincide with a peaking of CPI and a deceleration in Brazil’s current economic slowdown. Our quant models aren’t in full confirmation of this, however, which suggests the turn is likely further out in duration. From a longer-term perspective, Rousseff’s recently unveiled 2012 budget proposal is flat-out awful for the Brazilian economy.


Yesterday evening, Banco Central do Brasil’s monetary policy committee (COPOM) “surprised” economists by cutting the country’s benchmark interest rate, the Selic, -50bps to 12%. We used quotations around the word surprised because the move wasn’t very surprising at all. Brazil’s bond market, interest rate swaps market, and, perhaps most importantly, Brazilian officials have been signaling to us for at least the last the last few weeks that a rate cut was definitely in play – despite the fact that the country’s latest CPI reading came in at a six-year high of +6.9% YoY (40bps above the upper threshold band around the central bank’s target of +4.5%).


As we pointed out in our Weekly Latin America Risk Monitor on August 22nd:


“The big callout in Latin American fixed income markets is the -50bps wk/wk decline in Brazilian 2yr sovereign debt yields as expectations for future interest rate cuts continue to get priced into Brazil’s interest rate market (1yr on-shore swap rates declined -37bps wk/wk and -95bps MoM). Interestingly, Friday’s closing [2yr] yield of 11.54% is a full 96bps below the Brazilian central bank’s benchmark interest rate (the Selic).”


Eye On Brazilian Policy: “Oh No You Didn’t” - 1


On the political pressure front, we offer the following collection of recent quotes and sound bites originating from Brazilian policymakers if nothing more than to highlight how telegraphed and politically motivated last night’s rate cut decision was: 

  • “The central bank’s fight against inflation is being backed by fiscal policy.” – Central Bank President Alexandre Tombini on Aug. 1.
  • “Creating conditions to cut interest rates in Brazil is a priority… Lower rates would be very healthy because they would cut the cost of servicing the nation’s debt.” – Finance Minister Guido Mantega on Aug. 23.
  • “Brazil plans to halt a rise in government spending this year to prepare Latin America’s biggest economy for a global slowdown and make room for a cut in interest rates… As you reduce or stop increasing public spending, you open space for a reduction in interest rates when the central bank thinks it is possible.” – Finance Minister Guido Mantega on Aug. 29. (to Matega’s credit, Brazil did recently revise up its target for its 2011 primary surplus +11.4% to R$91B ($57B), though largely on aggressive measures to widen the tax base among consumers and corporations alike – as opposed to more traditional measures of austerity)
  • “The country’s interest rates should begin to fall as the government reduces spending… We want, starting now, to have lower interest rates on the horizon.” – President Dilma Rousseff on Aug. 29
  • “Brazil is anxiously awaiting a decline in the country’s interest rates… We are all anxious to see the moment when the rate of interest will drop... The government’s fiscal efforts may create the conditions for rates to fall in the very near future.” – Trade Minister Fernando Pimentel on Aug 30.


Needless to say, the central bank’s autonomy is being called into question. While this is certainly not the forum to debate the proper relationship between officials who determine monetary policy and those that determine govern the broader economy, the interplay in Brazil is one worth highlighting. To that tune, check out the notes regarding this subject below, which were compiled from various sources in the Brazilian press by Moshe Silver, Chief Compliance Officer and Managing Director here at Hedgeye: 

  • President Rousseff and her PT party hailed the rate cut, PSDB party opposition politicians say the central bank was afraid of President Rousseff and caved in to her politicized demand.
  • Former central bank president Carlos Langoni says the COPOM decision is a “daring” move that calls the central bank’s credibility into question and needs to be much better explained.
  • Yesterday’s COPOM meeting dragged on for an unusually long four hours, and two directors voted against the decision. 

It will be interesting to see whether or not Tombini and his divided board are jumping the gun. As we alluded to earlier with headline CPI currently running at a six-year high, inflation is not tamed within Brazil. Moreover, the most recent inflation-related data points would suggest that price pressures could indeed be increasing on the margin: 1) IBGE IPCA-15 CPI accelerated in Aug. to +27bps MoM; and 2) FGV IGP-M CPI accelerated in Aug. to +44bps MoM. We do, however, expect YoY headline CPI to peak in August and begin slowing like the most recent IGP-M print, which decelerated to +8% YoY (vs. +8.4% prior). Tombini’s models echo that of our own, saying recently, “Policymakers are more comfortable with inflation because annual price increases will slow starting in September.”


It certainly is unusual for a central bank to be this aggressive – particularly when the data has not yet confirmed their outlook. Specifically, the last time the global economy was this close to the precipice, Banco Central do Brasil waited patiently for confirming data to cut interest rates (over four months after the collapse of Lehman Bros). Interestingly, President Rousseff said in early Aug. that the Brazilian economy was “stronger that it was at the time of the Lehman bankruptcy” and that the country has “the necessary conditions to meet the global economic crisis”. Given yesterday’s aggressive maneuver out of the Brazilian central bank, perhaps they believe the Global Macro environment will deteriorate faster than they had originally anticipated and far worse than what we saw in the Lehman aftermath. Something to keep in mind there as it relates to “what people are saying out there”…


Their aggressiveness this time around could be a good thing or it could be a bad thing, particularly if inflation expectations increase and push up the long end of Brazil’s interest rate curve – which it did not do today (in fact, Brazil’s benchmark 9yr bond yield has fallen -17bps day/day). Regardless, we commend Banco Central do Brasil for having conviction in their process and being daring enough to step outside the box and help the ailing Brazilian economy with an “unsuspected” rate cut. Furthermore, analysis of their accompanying statement would suggest that they truly believe a rate cut was warranted – as opposed to being merely politically motivated: 

  • “Re-evaluating the international scenario, the Copom considers there was a substantial deterioration consisting of, for example, a generalized reduction of great magnitude in the growth projections for the principal economic blocs.”
  • “It also notes that, in these economies, the space to use monetary policy is limited and the outlook is one of fiscal restrictions. “
  • “In this way, the Committee evaluates that the international scenario shows a disinflationary bias in the relevant time period.” 

It is important to highlight how their outlook for the global economy stands counter to the bullish storytelling within our domestic institutional investment community.


As it relates to the Brazilian economy at large, it will be interesting to see if this is an inflection point in Brazil’s economic cycle or merely a catalyst for a deceleration in the current slowdown. Our models point to the latter, and that may explain why the Bovespa index is still broken from a TREND and TAIL perspective, despite a +14.4% melt-up “off the lows”. It will pay to wait to see if the Bovespa breaks out and holds above its critical TREND line of resistance. If that happens, we think this market trades between 59,765 and 66,303 over the intermediate term. A breakout above the TAIL line would be incredibly bullish indeed and would likely coincide with more aggressive rate cutting.


Eye On Brazilian Policy: “Oh No You Didn’t” - 2


On the subject of cutting, Brazilian policymakers “did it again” with regards to hyping up budget cuts and falling well short of the expectations they set with the Brazilian public. Yesterday, President Rousseff’s 2012 budget proposal was introduced and, needless to say, it’s rife with accounting tricks and aggressive assumptions that makes the administration appear more fiscally conservative than it is actually being.


In fact, this budget is actually seeking to “increase” the country’s primary surplus to R$140B from the projected R$128B. This does, however, include an accounting buffer that will allow it to discount R$40B, per Budget Minster Miriam Belchior. Without the accounting buffer, which Belchior publicly admits the administration would prefer not to use, the country’s primary surplus is expected to decline -21.8% next year.


Other key highlights from Rousseff’s budget proposal include: 

  • A +13.6% increase in the minimum wage and pension outlays;
  • A +15% increase in healthcare spending;
  • A +33% increase in education related outlays;
  • A +300% increase in social welfare spending; and
  • A GDP growth projection of +5% YoY (vs. Bloomberg consensus 2012E of +4%). 

We’ve been very critical of her administration’s budgeting gimmicks in past notes, so, for now, we’ll grant her the benefit of the doubt and reserve the bulk of our judgment for when/if the budget is actually ratified by the Brazilian Congress. Were the budget to become enacted as it stands currently, we believe it would be bearish for the country’s real economic growth over the long-term TAIL (higher rates of inflation).


All told, we view the central bank’s aggressive and proactive rate cut as supportive of Brazilian equities because it will likely coincide with a peaking of CPI and a deceleration in Brazil’s current economic slowdown. Our quant models aren’t in full confirmation of this, however, which suggests the turn is likely further out in duration. From a longer-term perspective, Rousseff’s recently unveiled 2012 budget proposal is flat-out awful for the Brazilian economy.


Darius Dale



DNKN was shorted this afternoon in the Hedgeye Virtual Portfolio.


DNKN is performing strongly today, up around 2% as we head towards the close.  Keith shorted the stock based on his quantitative model but we also remain bearish from a fundamental perspective.  We believe that the stock is egregiously overvalued, as we wrote on 8/22.  Investors buying DNKN today are paying a steep premium to SBUX, MCD, and YUM.  We do not believe that is a good deal!  Within the QSR space, only GMCR and CMG are awarded richer multiples by the Street. 


There are two events tomorrow that we think you should be aware of.  First, the Street initiates coverage tomorrow so we anticipate quite a lot of interest in the name (on a relative basis, of course, given the holiday weekend).  Second, we are catching up with the management team tomorrow in order to learn more about their growth strategy and other aspects of the business.  We will be posting any important takeaways from the call.


As the chart below shows, the immediate-term TRADE lines of support and resistance are $25.03 and $27.11, respectively.


DNKN: TRADE UPDATE - dnkn levels



Howard Penney

Managing Director


Rory Green


JCP: Covering TRADE


Keith is booking another gain covering JCP in the Hedgeye Virtual Portfolio with the stock immediate-term TRADE oversold according to his model. We remain bearish on the stock over the intermediate-term.


While still early in the quarter, August sales came in very light this morning -1.9% (vs. +1.7%E) supporting our below consensus numbers. The Street is currently expecting flat sales in the 2H on LSD comps. We’re modeling sales down -1% and -3% on comps of +1% and -1% in Q3 and Q4 respectively.


Keep in mind, the company had several new introductions last year in Q3 (LIZ excl, Mango, Modern Bride) that they have to lap in addition to catalog sales rolling off. We’re expecting sales from existing stores to be down -$180mm in addition to the negative drag from the catalog business to the tune of $200-$260mm coming out in the 2H. With pressure on growth from existing stores coupled with catalog sales coming off, JCP will be significantly challenged to meet the Street’s sales expectations over the intermediate-term.


As for the headline regarding the company selling outlet stores that just hit the tape - it's old news and inconsequential to the bigger call here.


At $1.60 for the year, we remain 10% below consensus and bearish on the stock over the intermediate-term.


For more info on our thesis, see our Black Book, “JCP: What Ackmanists Are Missing.”


JCP: Covering TRADE - JCP VP levels 9 1 11



Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.