According to the National Bureau of Statistics, the annual inflation rate in China decelerated to 5.5% in October from 6.1% in September. 


Hedgeye Financials posted this on today's MBA Mortgage Purchase Applications print - "The MBA Purchase Index rose 4.8% last week, bringing the series to an index level of 173. In spite of this improvement, purchase application levels remain roughly 5% below their rates from the summer. At the current rate, applications will finish the year roughly 10% lower than 2010. We reiterate that this has a direct read through to prices."






THE HBM: CBOU, CAKE - subsector fbr





CBOU: Caribou Coffee reported 3Q EPS after the close yesterday of $0.07 versus expectations of $0.06.  Comps increased 4.1% and FY11 and FY12 guidance of $0.39-$0.41 and $0.48-$0.51, respectively.  Consensus is at the high end of both ranges.





CAKE: Cheesecake Factory says it’s doing nearly anything it can to lower costs without cutting portions during a time of high commodity-price inflation.  “We have to balance the need to protect margins with the even greater desire to grow guest counts”, said CFO Douglas Benn.  WSJ


THE HBM: CBOU, CAKE - stocks 119



Howard Penney

Managing Director


Rory Green


Great Inflations

This note was originally published at 8am on November 04, 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 fear of another great inflation remained with him all his life.”

-Niall Ferguson


Inflation is a centrally planned policy. Period.


History is littered with examples of governments devaluing their fiat currencies for short-term political resolve. Keynesians can call their goals “price stability” and “full employment” all they want. The People are starting to call that a joke. In the long-term, banning both gravitational forces and the truth about long-term prices will be difficult.


The aforementioned quote comes from an excellent book that I am in the middle of studying – Niall Ferguson’s High Financier – The Lives and Times of Siegmund Warburg. In the Post 1913 Federal Reserve Act Period (Chart of The Day), there are very few merchant bankers (not to be confused with central or too-big-to-perform bankers) who rival Warburg’s legacy.


What’s most interesting to me about Warburg (like it is with most revolutionary capitalists), is where he came from. Context and experience are some of the things I personally thank God for every day of my life. For Siegmund Warburg, context and experience are what made him the change that the British and American banking systems needed to see.


“I brought something to England which was a little bit different because I was a damn foreigner, a German Jew.”

-Siegmund Warburg (High Financier, page 233)


You don’t have to take my word for it on any of this. I’m just a Canadian who came to the American Financial Empire in 1995 and studied the source code of Keynesian economic dogma at Yale in my cutoff jean shorts.


Take Harvard’s word for it – Ferguson’s book has 104 pages of footnotes.


You don’t have to take Warburg’s word for it either – few in the Establishment of the British economic elite did after he became a British citizen in 1939. But when a post WWII debt-laden England resorted to debauching the British Pound, Warburg called them out on it, big time.


Great Inflations?


Warburg lived through Germany’s hyperinflation of the 1920s and the politicized central banking that perpetuated it. Today’s good ole boy network money printing is not a new strategy. We don’t have that hyperinflation (yet) either. But the manic financial media seems hell bent on cheering on its catalysts.


WTIC and Brent Crude oil prices are trading at $95 and $112/barrel this morning. Deflation? Pull up any long-term chart that doesn’t use 2008’s $150/barrel oil price as its anchoring point in the analysis (all-time high), and you’ll conclude what every man, woman, and child from Kenya to Vietnam already has – Keynesian monetary policies are exporting generationally high levels of food and energy inflation.


Warburg didn’t believe in trading prop, levering up his client deposits, or front-running client capital. His strategy was to simply keep his bank’s balance sheet liquid and conservatively positioned throughout the British and French currency devaluations of the 1950s and 1960s. He also avoided getting train wrecked by the US Dollar Devaluation that ensued under Nixon and Carter in the 1970s.


Warburg fundamentally believed that “inflation was primarily a political phenomenon caused by governments who do not have the courage to either reduce their expenditure or to cover it by taxation.” (High Financier, page 36). Sound familiar?


The sad and pathetic reality about Western Economic Leadership in the 21stcentury (read case studies of both Bush/Obama US Administrations, the 8 or 9 Japanese PM’s they’ve had in the last decade, or … uh, Europe!), is that this is all very familiar.


“To sin by silence when they should protest makes cowards of men.”

-Abraham Lincoln


The metaphor that Ferguson and I make between the British Empire’s peak (then) and America’s (potentially now) is a very important debate that needs to be had. If we repeat history’s mistakes, our children have no business forgiving the elephantine intellects endowed upon us from our Ivy League institutions.


In the late 1940’s and early 1950’s Warburg was at least as critical of British policy as Hedgeye and many others are of US fiscal and monetary policy today.




“By the September 1949 devaluation, which saw the Pound’s dollar value reduced by 30% from $4.03 to $2.80, his Wartime enthusiasm for Labour had waned significantly… he argued in a highly critical memorandum written in August of that year … The country was spending too much on defence. Profits and pay were on a much too high level… the employers indulge frequently in illusions as to the profits …” (High Financier, page 131)




But, but, but … if you don’t adjust them for inflation, ‘corporate profits are great’… and we continue to beg for The Bernank and/or the Italian Job from Super Mario, to cut, print, cut… beg, cut, print… print, bail, cut…


If you’ve been awake since 2006 and watched Big Government Interventions A) shorten economic cycles and B) amplify market volatilities, you get it. Great expectations for Great Inflations have become the root of the common man’s heartache.


My immediate-term support and resistance ranges for Gold, Oil, German DAX, and the SP500 are now $1724-1784, $92.66-94.86, 6105-6413, and 1251-1267, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Great Inflations - Chart of the Day


Great Inflations - Virtual Portfolio

Clever Confusion

“A clever person solves a problem. A wise person avoids it.”

-Albert Einstein


Yesterday was not a good day for me. Today will be. This is the game. And I love playing it.


Yesterday, I couldn’t have been more confused between the intraday and end of day signals I was getting in my risk management model. In general, when that happens (and I’ve had to learn this lesson the hard way by getting whipped around), the best decision is to take down exposure and get out of the way.


So this, fortunately, is what I did:

  1. Sold my US Equities in the Hedgeye Asset Allocation Model back down to 0% (from 6% on the open and 12% the week prior)
  2. Sold my LONGS in the Hedgeye Portfolio (different product) down from 9 LONGS on the open to 7 LONGS by the close
  3. Stayed with my best Global Macro long ideas – US Dollar (UUP), Long-term Treasuries (TLT), long UST Flattener (FLAT)

Unfortunately, staying with these long positions (UUP, TLT, and FLAT) made me feel shame yesterday. That’s what you should feel when you lose. Losing means you didn’t have it right. Winners need to lose before they can really learn how to win.


Intermediate-term to long-term investors have not been losing being long these positions for the last 6-9 months as it’s become clear that Global Growth Slowing will dominate Global Macro investing in 2011.


Most of the losers out there who focus on whining and finger pointing will obviously disagree with that statement – blame Europe or blame Canada for US GDP growth being 0.36% in Q1 or China slowing sequentially throughout the year – that’s easier, I guess.


There is nothing that’s been easy about investing in a globally interconnected macro marketplace in 2011. That will not change with French, Italian, and US Equities collapsing early this morning.


Ironically enough, Madame Lagarde seems to be geeking out on Le Chaos Theory this morning, prefacing her great depression fear-mongering speech to the last bastion of money printing – the IMF:


“In our increasingly interconnected world, no country or region can go it alone… there are dark clouds gathering in the global economy.”




On what part? The Lord Voldemort darkness of it all that is required to scare the hell out of people, or the socializing of losses part where only the young can dare “go it alone” in this world and bet on themselves?


If you thought all of this begging, banning, and printing was going to end well, you certainly didn’t get that call from me. In the last 4 years of ranting to you, I have to say that some days it really sucks to have to write about reality.


I’m on the same team as you. I am responsible for both my family and firm’s well being. I am looking to make this world a better place for my kids. But piling-more-policy-upon-policy is not the way out of this confidence spiral. It’s sucking the life out of capitalism.


Let us fail.


That’s the only way anyone on any team I have ever played on was really able to learn. Let me give-away the puck in front of 10,000 crazy fans wearing Badger red in Wisconsin (when my Mom is in the stands wearing blue) and let me hear that building light me up with insults like a Christmas tree in December for giving away a Yale goal.


Mucker, high and off the glass next time, eh?


Avoiding risk is important. It’s a process, not an emotional beta chasing point. Here are some of the most important lines in all of Global Macro to avoid “buying the dip” on:

  1. EUR/USD $1.37 – do not buy Euros on that breakdown if/when it occurs (buy US Dollars)
  2. SP500 – do not buy the SP500 if it cannot sustain itself above 1268 TAIL line resistance
  3. CAC40 (France) – do not buy French stocks if the intermediate-term TREND line of 3403 isn’t recovered

With everyone talking about Italy this morning, focus on France. We’ve been shorting Italy for 2-years and as of this morning it’s still crashing (down -34.5% from its YTD peak). Berlusconi is going away, but European Stagflation isn’t.


Focus on where the puck is going, not where it’s been. If I had to learn that risk management lesson from The Great One, so be it. I’ll take that over losing money today, all day long.

My immediate-term support and resistance ranges for Gold, Oil, German DAX and the SP500 are now $1, $94.01-97.07, 5, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Clever Confusion - 1. EL EUR


Clever Confusion - Virtual Portfolio


The Macau Metro Monitor, November 9, 2011




China’s October housing transactions fell for the first time in three months, declining 25% from September.  The value of homes sold last month dropped to 372.3 BN yuan (US$58.7BN) from 493.9 BN yuan in September, based on data from the statistics bureau.



According to the National Bureau of Statistics (NBS), China CPI rose 5.5% YoY in October, weakening from September's 6.1% rise.  The October CPI growth marked the slowest surge since May this year.  On a monthly basis, the cost of living added 0.1% in October.




TODAY’S S&P 500 SET-UP - November 9, 2011


As bad as Hedgeye was positioned from a Global Macro perspective into yesterday’s close will be as well positioned as I am this morning.  As we look at today’s set up for the S&P 500, the range is 27 points or -1.40% downside to 1258 and 0.71% upside to 1285. 




In the very immediate-term, bullish is as bullish does. If I were to use a 1-factor model (like the 200-day moving average), there would be no mincing of those words as of tonight’s close. Fortunately, I’ve learned not to use 1-factor/1 duration models. 


The bottom line from here is that VOLUME and VOLATILITY signals need to confirm this PRICE move to make it 3 for 3 on the factors that matter to me most (Price/Volume/Volatility). PRICE was a head-fake at the October 31stclosing high of 1285, so stay tuned.


Yesterday’s volume was 25% below the 30-day average. Today’s was down -13%. Tomorrow we need to see the juice. Volatility’s TREND and TAIL lines of support are 26.77 and 22.11, respectively.


All 9 Sectors in this model are bullish immediate-term TRADE (that’s not new) and 7 of 9 are bullish TREND (Financials and Basic Materials are the 2 bears on TREND and TAIL – Small Caps (Russell 2000) are also bearish TAIL w/ resistance up at 778. The SP500’s TAIL line remains 1268.









  • ADVANCE/DECLINE LINE: +1459 (+1153) 
  • VOLUME: NYSE 879.63 (+12.38%)
  • VIX:  27.48 -7.94 YTD PERFORMANCE: +54.82%
  • SPX PUT/CALL RATIO: 1.91 from 2.30 (16.85%)




TREASURIES – long-bond investors in the US have not been suckered into this hope that Global Growth is just fine. 10yr yields already broke the TRADE line of 2.12 supports last week (that’s why we are were long TLT) and are trading 1.98% last as the Yield Spread compression continues.

  • TED SPREAD: 44.42
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.10 from 2.04    
  • YIELD CURVE: 1.85 from 1.79


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage (prior 0.2%)
  • 9:30am: Bernanke speaks at Fed conference on small business
  • 10am: Wholesale inventories, est. 0.5% (prior 0.4%)
  • 10:30am: DoE inventories
  • 12:15pm: Fed’s Tarullo speaks on regulation in NY
  • 1pm: U.S. to sell $24b in 10yr notes


  • Italian 2-yr note yield rises above 7%, more than 10-yr rate
  • Ohio voters repealed a law limiting collective bargaining for public employee
  • HSBC said outlook for global economy is “challenging”, profit at its investment bank shrank by 53%
  • American Airlines, its pilots union said the two sides may reach a labor agreement within days
  • President Obama to meet with Portuguese President Anibal Cavaco Silva, then speak at National Women’s Law Center
  • SEC’s Robert Khuzami speaks at National Conference on the Foreign Corrupt Practices Act, 8:45am







  • Aluminum Slump Means 25% of Smelters Losing Money: Commodities
  • Noble Said to Plan $700 Million IPO for Agriculture Business
  • ArcelorMittal Outlook Cut to Negative by S&P on Steel Market
  • Oil Increases a Sixth Day as Iran Nuclear Work Poses Supply Risk
  • Sand Like Gold Boosts Greenbrier’s Railcar Production: Freight
  • U.K. Gas Spread to U.S. Rises on Japan Demand: Chart of the Day
  • Nestle Uses Sandbags as Thai Floods Threaten 322 Factories
  • Wilmar’s Profit Misses Estimates on Foreign-Exchange Losses
  • MF Global Settlement Over Losses in Doubt After Bankruptcy
  • Diesel Ending Biggest Gain in Asia Since March: Energy Markets
  • Oil Drops on Concern Italy’s Turmoil May Derail European Economy
  • Copper Advances First Day in Four as China Inflation Cools
  • China Aluminum Output Falls to Eight-Month Low; Copper Drops
  • Freeport Indonesia Workers to Extend Strike for Third Month
  • Corn Futures Advance on Concern USDA May Lower Harvest Estimate
  • Sumitomo Risk Unit Asia Clients Up 67% as Europe, U.S. Slow
  • MF Global Commodity Traders Ask Permission to Access Cash








ITALY – ring the royal Rubicon’s gong – because how people are chasing beta around this Berlusconi event is a certified gong show. They loved chasing yesterday’s US Equity close, now they hate everything Italy. Bond yields have gong parabolic as the MIB Index snaps its only remaining line of support (TRADE line of 15,894). Italy is crashing don’t forget – down -34.5% since its YTD high. Bullish?






CHINA – Growth continues to slow. Period. Not falling off a cliff slow, but slower is what matters in our macro model and we don’t see Chinese GDP growth arresting the slope of its decline until Q1 of 2012. Inflation data came in right on our estimate at 5.5%, but look for that to shoot up again sequentially in November with Oil prices up here.









  • Israel May Lack Capability for Effective Iran Military Strike
  • Iran Continued Nuclear Weapons Work Seeking Warhead Design
  • Oil Increases a Sixth Day as Iran Nuclear Work Poses Supply Risk
  • Syrian Monitoring Project May End as Italy Firm Weighs Options
  • Iran Nuclear Report Prompts U.S., Europe to Move for Sanctions
  • Qatar Dismisses Architect Concern on World Cup Air-Conditioning
  • U.K. Regulator Levies Highest-Ever Fine Against Dubai Investor
  • Dubai Shares Rise as Berlusconi Quit Offer Boosts Europe Outlook
  • Aluminium Bahrain Racketeering Case Against Alcoa Reopened
  • Standard Bank Wins U.K. Case Against Saudi Billionaire Over Loan
  • U.A.E. Stock Markets May Allow Short-Selling in First Half
  • OPEC Boosts 2015 Oil Demand Forecast Following ‘Swift’ Recovery
  • Iran’s Ahmadinejad Says He Won’t Retreat From Nuclear Program
  • Abu Dhabi Islamic Bank to Hold Investor Meetings for Sukuk Sale
  • Gulf General Reports Third-Quarter Loss as Finance Costs Rise
  • Iran 'Will Not Budge' From Nuclear Path, Says Mahmoud Ahmadinejad
  • OPEC to Account for 51 Percent of Oil Supply by 2035, IEA Says
  • Mideast Oil-Tanker Charters May Reach 2011 High, Marex Says


The Hedgeye Macro Team

Howard Penney

Managing Director

Early Look

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