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Small-business confidence


Yesterday, recession fears continue to weigh on U.S. small-business confidence, as the NFIB Index moved slightly higher in September, rising from 88.1 to 88.9.


The gain snaps a streak of six consecutive monthly declines. Despite the improvement, the index remains depressed, having been below 90 for three consecutive months. There was no noticeable improvement in the details; it is clear small businesses are in no rush to expand.




Corn and wheat prices have driven higher over the past week.  News emerging today from the government states that the U.S. corn crop, the world’s largest, will be 0.5% smaller than forecast last month after unusually hot weather in July and freezing temperatures in September reduced yields.







Food processor stocks have slowed as corn prices reversed the downward slide that had been helping the outlook of TSN, SAFM, and the rest of the industry.


THE HBM: TSN, SAFM, CMG, EAT, DRI, CAKE, PFCB - subsector fbr





CMG: An article in Fortune, published yesterday, is highly critical of Chipotle’s new concept, ShopHouse Southeast Asian Kitchen.





EAT: GS resumed coverage of Brinker at Neutral with a price target of $21. 


EAT: Chili’s Grill and Bar opened its first restaurant in Sao Paulo, Brazil.


DRI:  Coverage of Darden was resumed at Goldman Sachs at Buy


CAKE: Coverage of The Cheesecake Factory was resumed at Goldman Sachs at Sell


PFCB:  PFCB was resumed Neutral at GS, price target is $29.





Howard Penney

Managing Director


Rory Green



Stupid Easy

This note was originally published at 8am on October 07, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It’s not supposed to be easy. Anyone who finds it easy is stupid.”

-Charlie Munger


That’s one of the quotes Howard Marks uses to introduce his thought about what he calls “Second-Level Thinking” in his book that I just finished reviewing – “The Most Important Thing.”


People on Old Wall Street really don’t like being called stupid. They don’t like being called monkeys either. Both on the ice and in this Globally Interconnected Arena of risk management, I’ve been called plenty of names. It’s what gets me up in the morning.


Name calling isn’t nice. Neither is lying to people or blowing up their money. In some conflicted and compromised research report, this game looks gentlemanly. On the front lines though, this game is far from polite. It isn’t easy either.


Managing risk isn’t about getting a guy to call you with a whisper about this morning’s unemployment report. Neither is it about assuming we all know what we don’t know. It’s about embracing uncertainty, then considering scenario analyses, probabilities, and ranges. You don’t have to be a contrarian all of the time – but, some of the time, you need to play this game to win.


“Of course, it’s not that easy and clear cut … if your behavior is conventional, you are likely to get conventional results… Only if your behavior is unconventional is your performance likely to be unconventional.” (Howard Marks, The Most Important Thing)


Back to the Global Macro Grind


This morning’s setup across Global Macro is much more concerning to me than the one we were staring down the barrel of on Tuesday morning. Given that most of Asia and Europe was crashing and the S&P futures were trading at 1078 in the pre-market, that probably sounds like an unconventional thing to say.


Unconventional is as unconventional does. Covering shorts and buying that opportunity was too.


Today, after 3 consecutive days of The Pain Trade (short covering), all of Asia, Europe, and the US have rallied between +5-10% “off the lows.” The S&P futures are +5.9% from the YTD closing low (Monday, October 3rd 2011 = 1099), and if I had a Canadian Loonie for every email and tweet I’ve had that this US unemployment report is going to be “better than expected”, I’d pay myself for once.


I know. It’s unconventional for generals in this industry to eat last. It’s unconventional to be yourself instead of who you are supposed to be. It’s also been unconventional to have said Growth Slowing would be the 2011 call that needed to be made. If my behavior has sounded too “confident” or whatever it is that mediocrity calls success in this country these days, so be it.


Looking across my Global Macro factors this morning, here’s why I say start selling again today:

  1. Japan’s Nikkei’s 3-day rally failed at TRADE line resistance of 8777 and remains in crash mode
  2. Hong Kong’s rally failed at TRADE line resistance of 18,918 (Hang Sang) and remains in crash mode
  3. South Korea’s squeeze failed at TRADE line resistance of 1797 and remains in crash mode
  4. British banks are breaking down again and the FTSE remains in a Bearish Formation (bearish TRADE, TREND, TAIL)
  5. Belgium and Switzerland have taken over Europe’s negative divergences for this morning (big bank exposures for both)
  6. Russia’s Trading System Index rallied to another lower-high and is down -39% since April when US stocks peaked
  7. Oil prices remain in a Bearish Formation despite another bounce to lower-highs
  8. Copper prices remains in Bearish Formation despite a big short squeeze from a very newsy September oversold low
  9. Gold is now bearish TRADE and TREND for the 1sttime in forever with TREND line resistance up at $1673
  10. SP500’s TRADE, TREND, and TAIL lines of resistance (Bearish Formation) = 1182, 1237, and 1266, respectively

So that’s just the Top 10 unconventional calls you could have been making for the last 3-6 months. If you back this up to when we bought the Growth Slowing Trade (Long the US Treasury Flattener (FLAT) in February) you’ll see a lot of Global Equity prices put in their 2-year cycle peaks in February of 2011, not April.


And while its conventional to call out the SP500 as having “staved off a bear market” this week (because it didn’t violate the -20% crash signal; it was down -19.4% on Monday’s close), its unconventional to remind the bulls that Financials (XLF), Industrials (XLI) and Small Caps (Russell2000), have all crashed already in 2011 anyway.


Can the market rally on hope? For sure. It just did. But what do you do right now? If this unemployment number is better or worse than expected, my Stupid Easy hockey head answer will remain the unconventional one for 2011 – sell.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1602-1673, $75.92-85.11, and 1101-1172, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Stupid Easy - bearish formation


Stupid Easy - virt. port

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Buying Things Well

“Investment success doesn’t come from buying good things, but rather from buying things well.”

-Howard Marks


In Chapter 4 of Howard Marks’ “The Most Important Thing” he discusses a very hot topic at our Yale campus headquarters these days – the relationship between price and value.


American shoppers tend to get this concept much more readily than some American Institutional Investors do. Why? Probably because Americans shop using their own money as opposed to other people’s money. A subtle difference that focuses the mind.


Rather than opining on why I’ve been bearish on the “buy stocks because they are cheap” thesis since the February-April 2011 highs, I’ll submit one more concise thought from Marks that summarizes the crux of the matter:


An accurate opinion on valuation, loosely held, will be of limited help. An incorrect opinion on valuation, strongly held, is far worse.” (The Most Important Thing, page 23)


Back to the Global Macro Grind


Today, I’ll probably “sound” as bearish as I sounded bullish covering shorts last Tuesday. Plenty of people can’t reconcile how someone can be that way. They didn’t teach us how to be Duration Agnostic on a Keynesian campus, thankfully.


Plenty of people like to label people in this business too. That’s usually easier than taking the time to understand what it is that they do. We get it. This is Old Wall Street, until it isn’t.


On Wall Street 2.0, there will be Time Stamps.


To review, Hedgeye has made 3 “Short Covering Opportunity” calls in the last 2.5 months:

  1. August 8th
  2. September 12th
  3. October 4th

These were accurate immediate-term TRADE opinions about the relationship between price and value. On October 3rd, the Hedgeye Asset Allocation Model held a 73% position in Cash. On October 11th (before yesterday’s open), my Cash position was 61%.


On Old Wall Street 1.0, there are no Time Stamps. That’s dying on Opacity’s Vine.


Fully Occupied Transparency comes next.


Why be bullish, on the margin, before an +8.7% short squeeze, and be bearish, on the margin, after it? Price/Value matters – and everything about managing risk in a Globally Interconnected Macro market happens on the margin.


I wrote about being multi-factor and multi-duration as a matter of process yesterday. Nothing has changed on that front today. Across my Top 6 Global Macro Factors (and across durations), here’s what I see this morning:

  1. SP500 = bullish TRADE (1167); bearish TREND (1228) and TAIL (1266)
  2. VIX = bearish TRADE; bullish TREND and TAIL
  3. German DAX = bullish TRADE; bearish TREND and TAIL
  4. EUR/USD = bullish TRADE; bearish TREND and TAIL
  5. Copper = bearish TRADE, TREND, and TAIL
  6. 30-year US Bond Yields = bearish TRADE, TREND, and TAIL

So if those who are paid to think in a marketing vacuum want to call me Rosie or Roubini, they can whisper amongst themselves and have at it. No Duration Differentiation. No Real-Time Risk Management.


If you are reading this today, you’re paying for my rants … and on behalf of my research team, I sincerely thank you for having an open mind. We couldn’t Occupy Hedgeye without you.


Having been bearish in 2011 doesn’t mean we can’t help you buy “good things” well. We bought Starbucks in April of 2009 when no one wanted to touch it – that’s an American brand that means something, and will continue to for a long time.


In the last few months we’ve also bought Utilities (XLU), Target (TGT), and Marriott (MAR) well. These are 3 of the 10 LONG positions we have in the Hedgeye Portfolio that do stand the chance of actually being held for the “long-term.” Good balance sheets, dividends, and, most importantly, bought at good prices.


We get Graham and Dodd. It’s not that complicated, really. Buy low. But we also get Buffett and Munger’s #1 rule of investing that supersedes all of the vaunted “value” investing rules – DON’T LOSE MONEY.


Oh, and their second rule of investing is don’t forget rule #1.


My immediate-term support and resistance ranges for Gold, Oil, German DAX, and the SP500 are now $1, $84.42-89.71, 5, and 1167-1212, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Buying Things Well - Chart of the Day


Buying Things Well - Virtual Portfolio




TODAY’S S&P 500 SET-UP - October 12, 2011


After markets crash and funds have to liquidate, they have to cover their short positions – subtle but real factor and this short covering bid from Hong Kong to the S&P Futures remains relevant until it doesn’t; a 9-12% rally from bombed out lows is not atypical in a high volatility environment.


Longer term, every TREND line in the Hedgeye macro model is broken.


Earnings is always a hot topic in the bottoms up crowd and my overall point on earnings season is that it’s the riskiest we have “comped” in the last 6 quarters. Everyone and their brother knows “earnings have been good”, but earnings are cyclical, down Dollar has been a tailwind, and the Global Growth cycle has turned.


As we look at today’s set up for the S&P 500, the range is 45 points or -2.39% downside to 1167 and 1.38% upside to 1212




As of last night 6 of 9 sectors are positive on TRADE.  The Question now is can these newly captured TRADE lines of support hold? Earnings and Europe will decide the answer. There has not been a more important earnings season in 2 years and I think the cyclicals remain the liability.


Since the Yield Spread is cyclical, so are net interest margins at the Financials. That’s one of 3 Sectors (Financials, Energy, and Basic Materials) that have not recovered either TRADE or TREND lines of support. Tech has – that’s new. That makes Tech and Utilities the only 2 Sectors that are bullish TRADE + TREND.


Alcoa isn’t exactly a high quality of earnings company. But if the TREND is what the market is already forecasting (7 of 9 Sectors are bearish TREND), Alcoa’s guidance for everything to magically recover sequentially in Q4 (versus Q3 pricing pressure) will likely be met with contempt rather than complacency.









  • ADVANCE/DECLINE LINE: 343 (-2187) 
  • VOLUME: NYSE 882.22 (-0.66%)
  • VIX:  33.86 -0.48% YTD PERFORMANCE: +85.13%
  • SPX PUT/CALL RATIO: 1.90 from 1.96 (-2.78%)



  • TED SPREAD: 39.75
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 2.18 from 2.10     
  • YIELD CURVE: 1.86 from 1.80

MACRO DATA POINTS (Bloomberg Estimates):

  • 7 a.m.: MBA Mortgage Applications, prior (-4.3%)
  • 10 a.m.: JOLTs job openings
  • 11:30 a.m.: U.S. to sell $30b 4-wk bills
  • Noon: DoE short-term outlook
  • 1 p.m.: U.S. to sell $21b in 10-yr notes reopening
  • 1:15 p.m.: Fed’s Pianalto speaks at Univ. of Akron
  • 1:20 p.m.: Fed’s Fisher speaks at Abilene, Texas
  • 1:30 p.m.: Fed’s Plosser speaks on economy in Phila.
  • 2 p.m.: FOMC Minutes
  • 4:30 p.m. API inventories


  • China said the U.S. currency bill passed by the Senate alleging the yuan undervalued violates world trade rules
  • Slovakia, the only country that hasn’t ratified a revised European bailout fund, headed for a second vote after failing to approve the package yesterday
  • Wal-mart hosts investment community meeting; watch for comments by CEO Duke in am, CFO Holley on possible capex spending
  • Johnson Controls hosts strategy meeting; watch for 2012 EPS, rev.
  • Euro banks may face more stringent pay and bonus rules than rivals in North America, the Financial Stability Board said
  • Wal-Mart Halts Operations at More China Stores Over Labeling
  • ArcelorMittal Unit in Ore-Carrier Talks to Shatter Arctic Ice


COMMODITY/GROWTH EXPECTATION                                                                    





  • Alcoa Profit Misses Estimates as Europe Cuts Aluminum Orders
  • Gold Eclipses Cocaine as Rebels Tap Mining Wealth in Colombia
  • Saudis Lay 2,400 Miles of Rail to Ease Oil Dependence: Freight
  • Record Coal Price Risk Gaining on Australian Rain: Commodities
  • Oil Drops First Day in Six on U.S., Europe Fuel Demand Outlook
  • Gold Gains in London as European Debt Concerns Spur Demand
  • Copper Gains as Shrinking Asian Stockpiles Signal Steady Demand
  • IEA Cuts Oil Demand Forecast a Second Month on Slowing Economy
  • Industry Gas Use Shows Slowest Growth Since 2009: Energy Markets
  • Corn Extends Biggest Gain Since June 2010 on Stockpiles Demand
  • Ship Lines Delay Asia-U.S. Rates Plan on Unpredictable Cargo
  • Treasuries Decline, S&P 500 Advances as Commodity Producers Rise
  • EU Farm Policy Debate Pits Top Recipient France Against U.K.
  • Oil Rises Near Three-Week High as Europe Prepares Bank Support
  • CFTC Said to Have Enough Votes to Approve Speculation Limits
  • IEA Says Commodities No Longer a Separate Asset Class Since 2008
  • Palm Oil Advances a Third Day After Soybeans Rally on Exports




FROM KM - EURO – I wasn’t short it at the bottom; but I did say short it w/ impunity at 1.36 (TRADE line resistance) and I’ll keep saying the same up to the TAIL and TREND lines of resistance (1.39 and 1.43); this is one of the world’s biggest short positions (Paulson getting squeezed there now too), so don’t stress about it; just understand it and manage risk around it.






Slovakia's lawmakers have voted down an expansion of the euro zone's bailout fund ; the government of Prime Minister Iveta Radicova lost a confidence vote.  However, a repeat vote on the EFSF could be held later this week and passed, if the government receives the support of opposition lawmakers from the left-of-center Smer-Social Democracy, or Smer, party. This would likely require a cabinet reshuffling. The repeat vote on the EFSF is unlikely to take place Wednesday as more time for political talks will be needed.






Yesterday, Indonesia joined Turkey and Brazil as Emerging Markets that followed through with “surprise” rate cuts. (We use quotations because Hedgeye Macro clients have been warned of this since April.)  Expect more Deflating the Inflation to continue getting priced into the interest rate and FX markets of EM economies. Indonesia, Philippines, and Malaysia are all preparing or implementing fiscal stimulus to bolster domestic demand.








Howard Penney

Managing Director

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.37%
  • SHORT SIGNALS 78.32%