Buying Things Well

This note was originally published at 8am on October 12, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 $1646-1684, $84.42-89.71, 5614-6069, 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


Our Oct GGR forecast revised to $24.5-25.5BN, representing 34-39% YoY growth.



Macau slowed considerably this past week which is to be expected following Golden Week.  Average daily table revenues fell to HK$553 million this past week versus HK$1,085 million during the first 10 days.  We are unsure yet if hold played any role.  Our full month GGR October forecast is now HK$24.5-25.5 billion, which would represent YoY growth of 34-39%.


No unusual market share moves this week other than Galaxy giving up some of its share and MGM gaining.  However, overall market shares look consistent with recent trends.  



CHART OF THE DAY: Practitioners vs Professors


CHART OF THE DAY: Practitioners vs Professors - Chart of the Day

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Practitioners vs Professors

“Policy is the name we give to our future mistakes.”

-Henry Wallich


The late Henry Wallich (1988) was an economist, central banker, and Yale professor. He served under Eisenhower and was also a prolific columnist for Newsweek who was well known for his ability to connect with the common American citizen. He was accountable and accessible.


Yale University hosted a “Panel Discussion on the US Economy - How Do We Create More Jobs” last week that caught a lot of us in the ranks of Yale Alumni off guard. It wasn’t so much Yale’s esteemed James Tobin Professor of Economics, John Geanakoplos, suggesting that we “try inflation as a policy” that would have Wallich rolling over in his grave, as it was the glaring amount of partisanship on the panel.


To challenge the Yale Economics Department formally to a debate would be challenging the perceived wisdoms of Big Government Interventions and Keynesian Economics on their merits – so I will.


For those of you who have not already seen this Panel Discussion, here’s he link (  and my notes:


1.   Richard Levin - opens by saying “we did not stimulate enough”…  and goes on to suggest the US government should have acted as boldly as the Chinese did (which is interesting in and of itself, given that’s not a democracy). Levin thinks it’s “simple” - if we spent even more tax payer moneys, we’d have been fine. This is the Paul Krugman school of thought. Period.


2.   William Nordhaus – says the word “occupy” is the wrong word – he thinks it sounds like the “West Bank.” In terms of “substance”, he says “even if they are right”, it won’t work unless they have “well defined policies” (again assuming that all Americans think more policy is the answer to America’s problems, as opposed to less).


Nordhaus, like Levin, thinks Obama is right and we need a “jobs bill times 3” and “need to stop attacking the Federal Reserve.” He states plainly that any other idea is “partisan” (implicating himself as partisan). He addressed trivial points like the Gold Standard saying “give me a break … come on over to econ 122 and we’ll have a discussion.”


3.   Robert Shiller – starts by saying “every crisis is an opportunity… I have written 4 books… and now I have 10 minutes to talk”… “I think we should be improving our financial markets by democratizing and humanizing” (through Dodd-Frank type reforms – i.e. more policy)…


On the Jobs Bill (that was filibustered), I like to focus on “all the good things that were in that bill… building bridges and highways, hiring teachers and policemen, etc… but it seems to have a budgetary problem… in that it would raise the national debt”… “especially in times like this when we are in near depression- we need a balanced budget multiplier” (a Paul Samuelson theory from the 1940s)


4.   Aleh Tsyvinski – clearly the outlier – younger and more globally oriented in his macro thoughts (refreshing). Said what worries him in general is the “short-term focus on today’s crisis” as opposed to focusing on the “longer-term context” of large Keynesian experiments like Japan. “I am afraid we are on the verge of something much bigger and problematic in terms of long-term US economic growth.”


“Part of our employment problem has to do with the failure of policy… the theory of the multiplier effect didn’t work…” Says a lot of what we’re focusing on creating with policy could make the US economy look like Europe – slow growth, higher unemployment. “They put a lot pressure on politicians to act… but the overall objective should be long-term economic growth.”


5.   John Geanakoplos – “the occupy wall st movement will be a prelude to bigger riots”… Yale campus was in riots in 1, “when I was here in 1975, we missed the revolution… but we may have another chance!”


He wants to build bridges and allow for principal forgiveness (mortgages) – but he doesn’t want to just triple the size of the spend – he wants to “plan” for it. “Most economists didn’t predict any of this… the fact is that they got it all wrong…” … “so there’s something wrong… there’s something missing from our macro economics and our federal reserve process because they don’t focus on leverage…”




Levin summarized the panel’s ideas as follows: A) short term problem = full employment B) short term problem = housing C) long-term problem = economic growth. And we can solve for all of these with MORE of what didn’t work! Short-term, focus on infrastructure and “double down.” Short-term, focus on mortgage forgiveness. Long-term we need a balanced budget (which you cannot do if you do A and B) and raise taxes.




I think my daily strategy notes for the last 4 years and, more importantly, accurate forecasts in calling the last 2 major Growth Slowdowns (2008 and 2011) serve as ample repudiation of Keynesian Economics. That said, I think the most transparent and accountable way to have a rebuttal to all of the aforementioned academic dogmas gone bad is to have an open public debate.


There are 9 Yale grads on my team who would love an opportunity to explain how some of our undergrad “economics” teachings have failed our country in the real world. We can call the debate “Practitioners versus Professors” and I think anyone who’d like to find room to occupy a bi-partisan debate in their thought process will come out smarter having heard both sides.


My immediate-term support and resistance ranges for the Gold (back above its TREND line this morning), Oil (failing at its TREND line of $89.18), the German DAX, and the SP500 are now $1, $84.18-89.18, 5811-6192, and 1179-1242, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Practitioners vs Professors - Chart of the Day


Practitioners vs Professors - Virtual Portfolio




TODAY’S S&P 500 SET-UP - October 17, 2011


It should be as hard to sell/short this morning as it was to buy/cover on October 4th– every market (countries, currencies, commodities, etc) in Global Macro is now bullish TRADE; bearish TREND, making this a very tough spot not to cover.  Coming out of the G20 meetings this weekend, they loosely set everyone up for a bazooka event being timed for the October 23rdEU Summit meeting (Asia ripped last night on this and it’s been the #1 headline on Bloomberg since), but…


As we look at today’s set up for the S&P 500, the range is 63 points or -3.72% downside to 1179 and 1.42% upside to 1242






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: 2306 (+2703) 
  • VOLUME: NYSE 847.19 (-5.71%)
  • VIX:  28.24 -8.01% YTD PERFORMANCE: +59.10%
  • SPX PUT/CALL RATIO: 1.71 from 1.40 (+22.22%)


  • TED SPREAD: 38.95
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 2.26 from 2.19     
  • YIELD CURVE: 1.98 from 1.90


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Empire Manufacturing, est. (-4.00)
  • 9:15 a.m.: Industrial production, est. 0.2%
  • 9:15 a.m.: Capacity utilization, est. 77.5%
  • 11:30 a.m.: U.S. to sell $29b 3-mo., $27b 6-mo. bills
  • 7:30 p.m.: Fed’s Lacker speak on economy in Maryland
  • 8 p.m.: Fed’s Evans speaks in Detroit


  • Kinder Morgan agreed to purchase El Paso in a $21b cash-and- stock deal; watch other natural gas cos.
  • BP reached settlement with Anadarko Petroleum on all claims related to Deepwater Horizon accident in Gulf of Mexico
  • EU Economic and Monetary Affairs Commissioner Olli Rehn said clarity on plan to contain region’s debt crisis will emerge in “coming days”
  • Sales data for Apple’s iPhone 4S possible; note Apple will release quarterly earnings tomorrow


COMMODITY/GROWTH EXPECTATION                                                                    


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • BP Says Anadarko to Pay $4 Billion to Settle Gulf Spill Claims
  • Hedge Funds Add to Wagers in Biggest Rally of 2011: Commodities
  • China Growth May Top 9% as Global Slump Poses ‘Biggest Risk’
  • Rio Tinto to Sell 13 Aluminum Assets in Australia, U.S., Europe
  • Oil Gains After Europe Pledges Debt Strategy; Bullish Bets Rise
  • Hedge Funds Raise Bullish Bets as Oil Rises $10: Energy Markets
  • Gold May Climb for Second Day With Equities on Europe Optimism
  • Copper Rises for Second Day as European Crisis May Be Contained
  • Fortescue Boosts Ore Shipments 21% to Meet Chinese Demand
  • Freeport Shuts Grasberg Mine After Blockade, Fatal Shooting
  • China Steel Prices, at 10-Month Low, May Trigger Output Cuts
  • Oil Trades Near Highest in a Month on Europe Debt Rescue Efforts
  • Gold Gains to 3-Week High on Europe Concern, Commodities Rally
  • Corn, Wheat Rise for Second Day on Stronger U.S. Export Sales
  • Copper Drops in London, Reversing Earlier Gains
  • Palm Oil Advances to Three-Week High as Europe May Avert Crisis
  • Rubber Climbs to Three-Week High After G-20, Thai Flood Concerns
  •  Floods May Damage 3.5 Million Tons of Thai Rice, Group Says



THE HEDGEYE DAILY OUTLOOK - daily currency view





GERMANY – Schaeuble (Finance Minister of Germany who carries the big stick) just hit the wires saying he doesn’t expect to have a bazooka solution by the 23rd – that’s a big timing problem – and one that I think will be ongoing (can send you replay/podcast if the call we did on this Friday if you need details). Timing matters, big time; especially with TREND lines broken


THE HEDGEYE DAILY OUTLOOK - euro performance





SINGAPORE – stealth number that the manic media hasn’t even mentioned this morning, but Singapore put up a bomb of an export (non-oil) number for SEP at down -4.5% y/y (vs +3.9% in AUG, which was too low to begin with). Singapore is the trusted Chinese advisor and all market signals are saying China’s SEP numbers (tonight) could be bad


THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director


The Knapp Track report for September shows a sequential improvement in casual dining trends from August.


Estimated Knapp Track casual dining comparable restaurant sales grew +2.0% in September versus a final accounting period number of +0.4% (versus the prior estimate of +0.1% with negative weather impact of 60 bps) in August and +1.2% in September 2010.  The sequential increase from August to September, in terms of the two-year average trend, was 130 basis points. 


Estimated comparable guest counts were flat in September versus an August number of -1.0% and -1.4% in September 2010.  The sequential increase from August to September, in terms of the two-year average trend, was 110 basis points.


While the September Knapp Track numbers were stronger than we had anticipated, there are a number of factors worth noting.  Firstly, as Malcolm Knapp notes in the text of his report, the accounting number for the month of September will be “a bit lower” than the weekly estimate because, the report states, some concepts will include the last week in August in their September accounting results.  The first week of September benefitted from a rebound in comparable sales following Hurricane Irene as electricity grids were down and homes were flooded. 


One additional factor in September was the decline in gasoline prices.  Clarence Otis, CEO of Darden Restaurants, highlighted elevated gasoline prices as a major headwind for casual dining during DRI’s 4QFY11 earnings call on July 1st.  As the chart below shows, gas prices were extremely high during the second calendar quarter, peaking in May.  We believe that the significant fall-off in gas prices aided casual dining sales in September. 







All in all the Knapp data points are positive for casual dining stocks, on the margin.  We are not positive on casual dining stocks generally as we head through 4Q given the poor jobs outlook and poor consumer confidence levels.  EAT remains our favorite stock in the space.  We are negative on BWLD and TXRH.



Howard Penney

Managing Director


Rory Green



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