Faulty Interventions

“Intervention based on faulty theories of causes could easily make the problem worse.”

-Sylvia Nasar


I just started reading Sylvia Nasar’s “Grand Pursuit.” Her aforementioned quote comes from Chapter II titled “Must There Be a Proletariat? Marshall’s Patron Saint”, where Nasar focuses on Alfred Marshall’s contributions to the study of economics in the late 1800’s.


Ultimately, Marshall had a relatively easy go at it – certainly easier than I feel we have it in going after the Keynesians (Krugman, Bernanke, Dudley, etc.) here in 2011. All Marshall had to disprove were the dogmas of Malthus, Mill, and Marx (both “The Communist Manifesto” (Marx and Engels) and Mill’s “Principles of Political Economy’ were published in 1848).


By the time Marshall was finally able to put together his most influential British textbook (“Principles of Economics”) in 1890, the socialist ideas of “fair share” and left leaning Big Government Interventions had been broadly debased in the public forum.


A lot has happened since then, but the way academics cling to their dogma has not. Since becoming the Chairman of the US Federal Reserve in 2006, Ben Bernanke has operated on a faulty theory that his central plannings would:


A) maximize full employment and B) provide price stability.


Rather than some version of the opposite occurring, the exact opposite has occurred since Bernanke became responsible for his policy recommendations. Or has he been held responsible? As far as these eyes can see his policies have helped perpetuate:


A) shortened economic cycles and B) amplified price volatility.


Economics is not a “hard” science. It’s a social science that needs more math. The long-term history of economics is one where the dogmas of the older academic generation ultimately get rejected by the new generation.


In his 30s, Alfred Marshall was refuting Karl Marx… and by the time the 1920s rolled around, a 34 year-old currency trader (John Maynard Keynes) was refuting all of the British academic elite’s economic conclusions…


What’s different this time is that it’s taking a little longer to accept that Keynesian Economic theories of “causes” is what is making our global economic problems worse.


It’s Policy, Stupid. And we plan on standing on the front lines of this generational economic debate.


Back to the Global Macro Grind


I shorted the SP500 on the market’s opening strength yesterday (935AM EST, Time Stamped at 1244 SPX), and I plan on doing more selling throughout this morning’s Global Macro rally to yet another lower set of highs.


Here’s your real-time Global Macro economic data check:

  1. Chinese Exports for OCT dropped again sequentially to +15.9% vs +17.1% in SEP (Asian Growth Slowing)
  2. India’s Industrial Production growth dropped to its lowest level in 2 years (+1.9% SEP)
  3. Thailand Consumer Confidence plummeted to 62.8 OCT vs 72.2 SEP (food/energy inflation and floods)
  4. Indonesia surprised with another 50bps rate cut to 6% citing “external factors”; stocks closed down on that
  5. France’s inflation rate rose again in OCT to +2.5% as Industrial Production growth in France has moved to negative -1.7% y/y
  6. British PPI input prices up +14.1% y/y in OCT! ouchy

Most of this economic data has nothing to do with what’s going on with Princess Nancy or Super Mario.  It has everything to do with the two things that drive economic demand most in our models – Growth and Inflation.


Does the trifecta of Keynesian experimentation (Cutting rates to ZERO, then doubling down with Quantitative Easing) in Japan, USA, and now Europe (in that order) perpetuate rising inflation and slowing growth? You’re darn right it does.


This has already been empirically proven by some of the more mathematically oriented Keyensians themselves in “This Time Is Different” (Reinhart & Roggoff).


What are the real-time leading indicators saying about this (ie market prices):

  1. US Stocks are making lower-highs across all 3 durations in our risk management model (TRADE, TREND, and TAIL)
  2. US market Volatility is making higher-lows across all 3 durations
  3. European bond and stock markets continue to test a series of all-time lower-lows

Both the economic data and the markets that reflect upon that Growth and Inflation data are refuting Keynesian economic resolve. As the facts change, what do we do, Sirs?


I can tell you what I am going to do – I am going to keep doing what I have been doing since late 2007 when I decided not to be suckered in by these Faulty Interventions and broken assumptions about how it is that globally interconnected markets and economies work.


My immediate-term support and resistance ranges for Gold (we’re long GLD), Oil (bullish breakout – perpetuating European Stagflation), German DAX (broken), and the SP500 (we’re short SPY) are now $1, $94.21-98.46, 5, and 1, respectively. Our DOR, Daryl Jones, will be hosting our “Best Ideas. Period” call at 11AM EST.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Faulty Interventions - Chart of the Day


Faulty Interventions - Virtual Portfolio


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Initial Claims

The headline initial claims number fell 7k WoW to 390k (down 10k after a 3k upward revision to last week’s data).  Rolling claims fell 5.25k to 400k. On a non-seasonally-adjusted basis, reported claims rose 29k WoW.


There may be a degree of seasonality at work here, as both 2009 and 2010 saw a gradual decline into year-end before claims stagnated again in the early part of the following year.  


We’ve previously identified 375k – 400k as the claims range where unemployment can begin to improve. This is the second week that claims have printed below 400k. A sustained period at this level would be meaningful for unemployment. 












2-10 Spread

The 2-10 spread tightened 1 bp versus last week to 174 bps as of yesterday.  The ten-year bond yield decreased 2 bps to 197 bps. 






Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 






Joshua Steiner, CFA


Allison Kaptur


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Initial jobless claims came in at 390k versus consensus 400k and an upwardly revised 400k the week prior.  Rolling claims increased to 400k from 403.5k the week prior.


THE HBM: GMCR, CMG, WEN, AFCE, RRGB - initial claims 1110





THE HBM: GMCR, CMG, WEN, AFCE, RRGB - subsector fbr





GMCR: The top line was always going to be the straw to break the back of this one.  Predicting when it was going to be revealed was obviously the key.  Missing earnings and top-line expectations was certainly a negative point but the capex guidance was a major concern for us; the capital intensity of the business should be decreasing as the company grows.  What we have been observing is that the company’s ability to generate cash is less and less believable.  We would also note that the miss should have been bigger; the tax rate was highly favorable 4QFY11.


CMG: Chipotle Mexican Grill was upgraded to Hold at Miller Tabek.


WEN: Wendy’s reported EPS of $0.05 ex-items versus expectations of $0.04 but comps were slightly disappointing. As we wrote yesterday, the company has longer term issues to resolve but we are positive on the TAIL (three years or less) duration.


WEN: Wendy’s was downgraded to Hold from Buy at Deutsche Bank. 


AFCE: AFC Enterprises reported 3Q EPS of $0.25 vs consensus $0.23.  Domestic comps increased +1.7%.





RRGB: Red Robin Gourmet Burgers introduced a new burger to their holiday promo line-up, the Sweet Jim Beam Bacon Swiss Burger.  The burger is available through December 24th.


THE HBM: GMCR, CMG, WEN, AFCE, RRGB - stocks 1110



Howard Penney

Managing Director


Rory Green


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So analysts raise their estimates into the quarter due to high hold and then claim that normalized EBITDA missed their estimate?



"I am delighted to announce another quarter of record Adjusted EBITDA and net income for our Company, representing the ninth consecutive quarter of sequential improvement in hold-adjusted EBITDA. These results build on the significant achievements delivered through the first half of 2011 and demonstrate our ability to deliver sustained high-quality results, with strong company-wide performance across all segments, despite the introduction of additional supply in the market."


Mr. Lawrence Ho, Co-Chairman and Chief Executive Officer of Melco Crown Entertainment




  • Focused on maximizing the yields of all their gaming and non-gaming amenities
  • The market in Macau remains resilient and visitation remains strong.  Visitation from China is up 39%.  They are particularly bullish on the mass market growth in Macau.
  • Believe that the higher Mass win rate range of 23-26% is sustainable due to a number of initiatives
  • $195MM of EBITDA if they held at 2.85%
  • Increased amortization of land use rights from MSC from $5MM to $11MM
  • 4Q11 non-operating guidance:
    • D&A: $90-95MM
    • Corporate: $18-20MM
    • Net interest expense: $30MM


  • They haven't seen any slowdown.  November is seasonally slower so there is nothing unusual there.
  • China tightening - doesn't see any correlation so far between the policy and the market in Macau
  • Still see Mass growth exceeding the growth in visitation
  • Capex outside of MSC: $75-100MM for 2012
  • Confident that MPEL will be an early mover on the construction front for the next new project in Macau.  They are just restarting construction, not starting construction.
  • Table cap: 3% increase in tables per year after 2013.  The government understands that in order for new projects to work, they must have adequate table allocation.
  • Why is their win per table at Mass so much higher than Venetian?
    • They continue to focus on premium mass and high end mass gaming as part of their optimization strategy. 
  • They aren't seeing any traffic pattern or any collection issues on the VIP side
  • They feel like they can finance MSC at the project level and fund their portion through cash on the balance sheet and debt capacity
  • In July, they added a big junket - Neptune to CoD.  They should see a nice ramp as a result over the quarter and year  


  • Net revenue of $1,056 and Adjusted EBITDA of $240.3MM
    • CoD net revenue of $687MM and adjusted EBITDA of $170.5MM
    • Altira net revenue of $329MM and adjusted EBITDA of $79MM
  • "Our Studio City project continues to move closer towards realization. We are nearing the final stages of our design plans, while working closely with the Macau Government to complete the necessary approval process. We also continue to evaluate financing plans in relation to this project, including a bank loan and other debt financing." 
  • "In relation to our previously announced proposed dual-listing on the Hong Kong stock exchange, we continue to work through the necessary steps with the relevant Hong Kong regulators, while at the same time monitoring the market conditions to ensure we maintain full flexibility as it relates to our capital structure."
  • Cash: $1,450.5MM (including US$360MM of restricted cash)
  • Debt: $2.4BN 
  • Capital expenditures: $22.6MM, "of which US$8.1 million related to design and preliminary costs associated with Studio City, US$4.9 million for the development of the new Mocha site, with the remainder predominantly attributable to various projects at City of Dreams."

Forgetting Memories

“Nothing stands out so conspicuously, or remains so firmly fixed in the memory, as something you have blundered.”

-Marcus Tullius Cicero


I didn’t have a chance to watch the Republican Debate last night, but woke up to an email from a Republican operative contact intimating that Gingrich will benefit from Perry leaving the race.  This particular contact has been a vociferous supporter of Perry, so I was surprised by his comment.  After reviewing the transcript and key highlights this morning, I understand his point quite clearly. 


In an exchange in which he was asked which three federal agencies he would do away with, Perry confidently indicated that he would do away with the Department of Education, the Department of Commerce, and a third one which he couldn’t remember.   In the first attempt at trying to remember the third agency, he simply ended with “oops”.  In the second attempt, he ended with this statement:


                “I would do away with Education, the – Commerce and, let’s see, I can’t.  The third one, I can’t”


To Cicero’s point in the quote above, Perry will certainly remember his blunder, even as he couldn’t remember the three agencies. 


Normally, one bad exchange in a debate wouldn’t ring the death knoll for a candidate’s campaign.  In the case of Perry, his campaign was already on life support.  As we highlight in the Chart of the Day, the InTrade contract for his gaining the Republican nomination is now at 4.1%.  Not only is this the worst rating since he fully launched his campaign, but Perry is now trailing the embattled Herman Cain who is at 5.6%.


In general, last night’s debate likely will not alter the overall makeup of the race for the Republican nomination.  This is still Romney’s race to lose, and in a big way.  On InTrade, Romney is at 71%, while his second closest rival, Newt Gingrich, is at 9.1%.  In head-to-head polls amongst all the leading Republican candidates, Cain has led in some recent polls, but in aggregate since early October, Romney has either been first or second in every poll.  Finally, Romney has the money and team to stay deep in the war of attrition that is the Republican primary season.


Assuming Romney does get the nomination, the question is whether he can beat President Obama in a head-to-head matchup.  So far, at least, the numbers suggest that Romney will be the underdog in that matchup.  Currently, according to the Real Clear Politics poll aggregate, Obama, on average, beats Romney by +1.7 points.  To be sure, this is within the margin of error, though much closer than one would expect given Obama has an approval rating in the mid-40s and unemployment has a 9-handle.  Ultimately, as usual, turnout and motivation will be key and if the midterms were any indication, Republican turnout could be huge.


Flipping back to the market, undoubtedly yesterday was a day most investing minds would prefer to forget.  The SP500 was down -3.7% yesterday.  In particular, breadth was notably negative with one stock up on the day.  That stock was Bed, Bath and Beyond and the catalyst was a positive call from Cleveland Research.  If Cleveland Research is moving a stock, this is probably a decent flag for another important risk factor: light volume.  No surprise, to Hedgeye at least, financials were the weakest sector with the XLF down -5.4% on the day. 


Coincidentally, or not, our Financials Sector Head Josh Steiner held a call with Peter Atwater (former Treasurer of Bank One) yesterday to discuss the key new risks for financials.  Both Steiner and this industry veteran continue to believe that investors are underestimating the long term risks to financials, with Jeffries and MF Global potentially being canaries in the coal mine related to bank hedging.  If you’d like access to our Financials sector and a replay of the call, email


In Europe, the news and data flow appears to be going from bad to worse.  Front and center is the Italian bond market.  Italy sold €5 billion of 12-month bills this morning with average yield of 6.087%.  This compares to Italy’s last auction October when it sold the same duration of bills at 3.57%.  Further, Italian 10-year yields remain above the 7% line.  The Italian Senate is purportedly “rushing” to pass austerity measures with a vote tomorrow.  The likely outcome of incremental Italian action is accelerating stagflation in Europe.


On the last point, the EU lowered its Euro-region growth forecast due to the worsening debt crisis from +1.8% growth in 2012 to 0.5% growth.  Our view continues to be that European growth will likely be negative as inflation begins to accelerate alongside the eventual hum of the ECB printing presses.  Our view of Europe underscores one of our top macro ideas heading into 2012, which is to be long the U.S. dollar.


We will be holding our annual best ideas call tomorrow at 11am eastern.  This call will represents the best ideas, both long and short, across all seven of our coverage sectors.  We will be circulating all the materials to institutional subscribers later today.  For those that aren’t current Hedgeye institutional subscribers, please email for details around gaining access to the call.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Forgetting Memories - Chart of the Day


Forgetting Memories - Virtual Portfolio

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