Golden Handcuffs

“You know what it is? It is a golden handcuff, with the keys thrown away.”

-O. Henry


Keith and I are in San Francisco with our colleague, and one of the top young institutional salesmen in the business, Bill LeClerc, visiting some of our current and prospective subscribers. (We may also stop by the Googleplex for a quick game of roller hockey if Sergey and Larry accept the Hedgeye challenge.)  Having covered technology in the late 1990s and early 2000s, I know full well that there is something special about San Francisco, and I’m reminded of that on every visit.


Coincident with this visit, I’ve also been reading “Steve Jobs” by Walter Isaacson.  The story of Steve Jobs, and the creation of Apple Computer, is, in many ways, emblematic of the last thirty some years of business history in Silicon Valley.  Plenty of time has been spent rehashing Jobs’ incredible career and personal quirks, but I wanted to highlight one interesting quote from the book, which is as follows:


“Rod Holt, who had built the power supply, was getting a lot options and tried to turn Jobs around.  “We have to do something for your buddy Daniel, he said, and he suggested they each give him some their own options. “Whatever you give him, I will match it,” said Holt.  Replied Jobs, “I will give him zero.”


Now, I’m not about to psychoanalyze Steve Jobs, but I did find this excerpt interesting.  The Daniel in question, was Daniel Kottke, who was a college friend of Jobs and one of the first employees of Apple.  Unfortunately, Kottke wasn’t a high-enough level employee to be cut in on the option pool pre-IPO and Jobs, in a very dispassionate manner, wasn’t willing to make a “charitable” exception.  To Jobs, it seems, there were no free lunches.


Like global macro markets, Steve Jobs waited for no one.  At times Job’s personal drive was seen as extreme and insensitive, yet his success in innovation is difficult to compare.  As is widely known, Jobs was Buddhist, a long time vegetarian, and for much of his early career only showered once a week.  Despite these somewhat “liberal” tendencies, he created all of his businesses without the Golden Handcuffs of government intervention.


This morning we are seeing the downside of reliance on the Golden Handcuffs of government intervention.  Currently, major European equity markets are down across the board from -2.5% to -4.0%.  Leading the charge are Italian and Greek stock markets, down -5% and -6%, respectively. In terms of sectors, the European banking sector is at the forefront to the downside, with the major French banks down close to -10% across the board.


Certainly, this is crazy equity price action given that it seems like just yesterday that Europe was bailed out and saved from the sovereign debt contagion.  Well, actually it literally was yesterday, or at least late last week.  From the outset, we were suspicious of the Bazooka press release.  As Keith wrote last Thursday:


“In the end (and, in the end, this will not end well), I don’t think this concept of Bazooka Light will make a lot of sense to anyone who takes a deep breath and actually reads what it implies.


The timing and size obviously matter – but the timing (end of November? is subject to a hefty political debate) and the size is basically whatever the Europeans want the media to buy into the headline being.”


This morning the key question seems to relate to timing as there is news out that the Greeks will hold a referendum on the EU debt deal, most likely in the December / January time frame – along with a confidence vote on the government in the coming days.  It seems the Greek people, who according to reports yesterday have more Porsche Cayenne’s registered than tax payers making over $50,000 per year, want to take their time and think about the bailout.  Personally, I would probably want to think about the Golden Handcuffs before I put them on as well.  But as I noted above, global macro markets wait for no one.


In the Chart of the Day below, we’ve also flagged the widening spreads between Italian government bonds and similar duration German Bunds.  As of this morning, this spread is literally as wide as it has ever been.  Certainly, Greece is one thing, but Italy is the eighth largest economy in the world with debt-to-GDP at north of 120%.  Unfortunately, for those looking for good news, this widening of Italian yields is signaling that things are going to get worse before they get better in Italy.


To add insult to injury, we are receiving PMI measures this morning that are foreshadowing a further deceleration of growth in Europe. Specifically, Chinese PMI for October came in at 50.4 versus the estimate of 51.8 and U.K. PMI came in at 47.4 versus the estimate of 50.0.  Tomorrow morning, the rest of European PMIs are released. Stay tuned.


Mr. Draghi, welcome to the ECB!


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Golden Handcuffs - Chart of the Day


Golden Handcuffs - Virtual Portfolio








While coffee prices gained over the same timeframe, world coffee exports rose 9.4% in 2010-2011, according to the International Coffee Organization.   This is a bullish signal for demand.





THE HBM: DNKN, THI, BWLD - subsector fbr





DNKN:  Dunkin’ Brands posted Q3 EPS of $0.28 ex-items vs Reuters $0.25.  The company got to the $0.28 number when adjusting for a $14.7m sponsor termination fee and $7m amortization of other intangible assets charge.  Dunkin’ Donuts US comparable store sales growth was +6.0% versus SA Consensus of +3.3%.  The company also announced a secondary offering of 22 million shares.


THI: The National Hockey League today announced a deal with Tim Hortons that gives the quick-service chain title sponsorship of the 2012 NHL All-Star Game in January -- a move that will likely ease the path for other leagues who are exploring presenting or title sponsorship deals for their marquee events.





BWLD: Buffalo Wild Wings announced the opening of its 800th restaurant nationwide with the simultaneous opening of restaurants in Florida, Tennessee, Washington and California.


THE HBM: DNKN, THI, BWLD - stocks nov1



Howard Penney

Managing Director


Rory Green



This note was originally published at 8am on October 27, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The emotions aren't always immediately subject to reason, but they are always immediately subject to action."

-William James


If you gave me the written press release with what imprecisely this European band-aid actually says, I would have stayed short the SP500 (SPY) yesterday. That would have made me really wrong.


Rather than talking about what I would have, could have, and should have done, here’s what I did yesterday – and therefore where I stand for this morning’s emotional market open (Time Stamped):



10/26/11 11:33AM EDT

Booking It: SP500 Levels, Refreshed

POSITION: Long Consumer Discretionary (XLY), Short Consumer Staples (XLP)

After a 30 handle drop in the SP500, I’m booking it.


That doesn’t mean I’m bullish. It doesn’t mean I’m bearish. It doesn’t mean I can’t re-short it either. It just means that we’re holding my most immediate-term TRADE line of support at 1217.


Across our 3 risk management durations, here are the lines that matter most: 

  1. TAIL = 1266
  2. TREND = 1254
  3. TRADE = 1217 

So the intermediate-to-long-term picture still supports selling all rallies that extend themselves toward 1254-1266. And, until the immediate-term TRADE is no longer bullish (1217 support), I’ll respect whatever it is that the market sees coming next. As the Keynesian central planners have proven in the last 3 weeks, anything can happen.



And then… here’s what the Europeans did:


“The world’s attention was on these talks… We Europeans showed tonight that we reached the right conclusions.”

-German Chancellor Angela Merkel


And then… here’s what Global Macro markets started doing (which is what led Merkel to stating she has this right, for another day?):

  1. China was up small (+0.34%) and up for the 4thconsecutive day but, like the Hang Seng, remains bearish TREND and TAIL
  2. Japan was up +2% and the Nikkei remains below its intermediate-term TREND line of 9219 resistance
  3. Indonesia, Singapore, and Thailand were all up +2-3% on the squeeze, but all 3 failed to traverse their respective TREND lines
  4. Germany’s DAX is having the most impressive move, scaling slightly above its 6221 TREND line resistance (bullish if it holds)
  5. France’s CAC is up big but failing to eclipse its TREND line of resistance = 3411 (TAIL resistance for the CAC = 3889)
  6. Greece’s ATG Index is up over +3% and actually moved above its immediate-term TRADE line (784) for the 1sttime in 6 months
  7. CRB Commodities Index remains bearish TREND (327) resistance and bearish TAIL
  8. WTIC Oil has recovered its TREND line of $88.57 support, but remains a bearish TAIL (resistance = $93.87) after failing there
  9. Copper has recovered TRADE line support of $3.36/lb but remains bearish TREND ($3.90/lb) and TAIL
  10. Gold is back to bullish TRADE ($1671) and TREND ($1701), which makes sense post the biggest fiat bailout in world history
  11. 10-year US Treasury Yields have rallied from TRADE line support (2.04%) but failed to recover TREND line resistance (2.40%)
  12. Yield Spread (10s minus 2s) is +8 basis points wider day-over-day to 197 bps wide, well off the all-time high of 293bps wide in FEB
  13. US Dollar Index is holding TREND and TAIL lines of support of $75.37 and $75.77, respectively
  14. Euro is ripping the shorts right back up to the TAIL and TREND lines of resistance at $1.40 and $1.42, respectively
  15. My inbox and twitter streams are jammed with, “shouldn’t I cover… we could go a lot higher”

So, what do you do with all of this? If you are me, today you probably do a lot of nothing. When I worked for other people, that would not be a tolerable answer – we “smart” hedge fund people always have to do something…


Or do we?


In the land of chasing short-term returns, emotion is not often subject to reason. But very often it is “subject to action.” That’s mostly what I see going on here this morning and, effectively, why I have turned down offers to run Global Macro books for other people for the last couple of years. Been there, done that – and I don’t need to do things in life that I don’t think make sense.


In the end (and, in the end, this will not end well), I don’t think this concept of Bazooka Light will make a lot of sense to anyone who takes a deep breath and actually reads what it implies.


The timing and size obviously matter – but the timing (end of November? is subject to a hefty political debate) and the size is basically whatever the Europeans want the media to buy into the headline being.


It’s all theoretical multiples of leverage on the agreed upon EFSF baseline number. Obviously that’s the best way to threaten the shorts – remind them that you may not have any money, but that you can have lots of money if you print other people’s money and lever it up!


Mechanically, since the ECB and IMF have not formally engaged in backstopping any of these concepts of theoretical leverage, this is what happens next (in this order):

  1. Insolvent European banks have to try to raise capital in the public markets (good luck)
  2. If that doesn’t work, then they have to tap their national government (most of whom are tapped out)
  3. If that doesn’t work, tapping the EFSF is considered “last resort”

In other words, this keg of Bazooka Light will be tapped, then kicked… then the 2008 post TARP (October-November 2008) price volatilities begin.


My support and resistance ranges for Gold, Oil, German DAX, and SP500 are now $1701-1729, $88.57-93.87, 5829-6221, and 1226-1266, respectively. Emotional decision making today will be epic.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bazooka-Light - 1. chart


Bazooka-Light - Virtual Portfolio

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.


TODAY’S S&P 500 SET-UP - November 1, 2011


As we look at today’s set up for the S&P 500, the range is 53 points or -3.14% downside to 1214 and 1.09% upside to 1267. 




From a TRADE and TREND perspective, today’s selloff didn’t do much to the Sector Studies. The only Sector to break its intermediate-term TREND line today was the one that’s most negatively correlated to a rising US Dollar – Basic Materials (XLB).


That’s the good news. The bad news is that 4 of 9 Sectors failed to succeed in recovering their long-term TAIL lines of support – Financials (down -15.4% YTD), Basic Materials (down -10.3% YTD), Industrials (down -4.3% YTD) and Energy (up +2.1% YTD). Again, these Sectors all have 1 thing in common – they do not like a rising US Dollar like most Americans do. The SP500’s long-term TAIL (1267) broke again today too.


The Hedgeye asset allocation has moved from 0% US Equities this summer to 9% currently and embraces the Bullish Formation (bullish on all 3 risk mgt durations – TRADE/TREND/TAIL) in Consumer Discretionary (XLY) which, in terms of upside from here, looks more attractive to me than Utilities (XLU). We like both, but XLY better; especially if Strong Dollar Deflates The Inflation (= bullish for US Consumption and economic growth in 2012).




THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance



  • ADVANCE/DECLINE LINE: -1908 (-1851) 
  • VOLUME: NYSE 1143.02 (+13.27%)
  • VIX:  29.96 +22.14% YTD PERFORMANCE: +68.79%
  • SPX PUT/CALL RATIO: 3.02 from 1.54 (+95.59%)




  • TED SPREAD: 42.94
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.17 from 2.34    
  • YIELD CURVE: 1.92 from 2.06


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am/8:55am: ICSC/Redbook weekly sales
  • 10am: Construction spending, est. 0.3%, prior 1.4%
  • 10am: ISM, est. 52.0, prior 51.6
  • 11:30am: U.S. to sell $35b 4-wk bills
  • 4:30pm: API inventories


  • Greek’s PM Papandreou called referendum and parliamentary confidence vote, raising the prospect of derailing European bailout effort and pushing Greece into default.
  • Higher output from Honda and Toyota, combined with growing demand for full-size trucks by Ford, GM probably accelerated the SAAR to 13.2m vehicles.
  • Mario Draghi to succeed Jean-Claude Trichet as ECB President today
  • Congressional supercommittee meets on “Overview of Previous Debt Proposals,” 1pm
  • Senate is scheduled to resume consideration of amendments on spending bills




THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • China Mobile Skirts Apple to Add 5 Million IPhone Users: Tech
  • Gisele, Gwyneth, Demi Pose for Testino; Kapoor’s Scary Tunnel
  • Record Coal Premium Turning Into Bargain as Deals Sour: Real M&A
  • Esprit Drops as Europe Sales Slide on Weaker Demand
  • IPhone China Rival Focuses on Software for Half-Price Device
  • Sony Revamps TV Business After Seven Straight Annual Losses
  • Toshiba, Nippon Yusen Call for More Government Action on Yen
  • Mideast Dining Means Darden-Led U.S. Chains Follow Money: Retail
  • Amazon Boosts Cloud Computing Sales, Seizing on U.S. Budget Cuts
  • Indonesia’s October Consumer Prices: Summary (Table)
  • Colonel Sanders Devouring Little Sheep Means 69% Gain: Real M&A
  • United Breweries Falls in Mumbai After Quarterly Net Drops 11%
  • Thailand Oct. Consumer Prices Rise 4.19% From Yr Ago; Est. +4.5%
  • Drinking My Way Through 1,000 Belgian Craft Beers: John Mariani
  • Louis Vuitton Store, Offices in London Sold for $28 Million
  • Panasonic Forecasts Biggest Loss in Decade on Strong Yen, TV
  • Esprit First-Quarter Sales Rise 0.6% as European Demand Slows




THE HEDGEYE DAILY OUTLOOK - daily currency view






THE HEDGEYE DAILY OUTLOOK - euro performance




Chinese authorities rhetorically signaled that it will be neither a source of “dumb money” for the EFSF, nor will it be pressured into easing too soon.


2007-08 Similarities Watch: Hong Kong Money Supply (M3) turned negative on a YoY basis in Sep like it die in 2Q08

Australia cuts key rate to 4.5% in first reduction since 2009.



THE HEDGEYE DAILY OUTLOOK - asia performance






The Hedgeye Macro Team

Howard Penney

Managing Director




The Macau Metro Monitor, November 1, 2011




October GGR was MOP26.85BN (HK26.07BN, US 3.35BN), up 42.3% YoY.



Secretary Tam said the bylaw to ban slot-machine parlours from residential districts is “in the final stage of the legislative process”.  Once the bill is enacted, the government will negotiate a schedule with operators for the removal of parlours currently operating in such areas, added Tam.  The government is proposing to define an area within a radius of 300 to 500 meters from a casino as a “gaming zone”; anything outside of that will be considered a residential area.  The government will also not allow any more new parlours to be built in residential areas.  Parlours will only be allowed in casinos, hotels or commercial buildings.


When asked about SJM Holdings Ltd.’s Yat Yuen Canidrome Slot Lounge in Fai Chi Kei, Mr Tam said that the government would consider its removal if most residents deem it as a negative issue.



Brinker was bought in the Hedgeye Virtual Portfolio this afternoon.


Keith just bought Brinker in the Virtual Portfolio as the quantitative setup, per his model, is favorable at current levels.  The chart below illustrates our TRADE and TREND levels for the stock. 


From a fundamental perspective, as we wrote in our note titled “EAT – CAN THEY EXECUTE?” on 10/27, we believe that the company is operating well and will continue to improve going forward.  At Chili’s, the remodeling program, kitchen retrofits and other initiatives are going to boost sales and customer satisfaction.  As our note from last Thursday highlighted, we believe that the skepticism among the sell-side community is misguided and would not interpret this negative sentiment as being anything other than a positive for a buyer of the stock.  Please refer to our note from Thursday for further details or reply to this email for a copy.


This stock has been one of our favorite names for some time and is one of our top three long picks in the space.


EAT: TRADE UPDATE - eat levels 1031



Howard Penney

Managing Director


Rory Green


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.