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Self Indulgence

This note was originally published at 8am on November 08, 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 crisis, he came to believe, was a consequence of the self indulgence of the older generation.”

-Niall Ferguson (High Financier, page 64)


That’s what Siegmund Warburg thought about European governments coming out of the 1920s. I wonder what he’d think about them now? Top 3 headlines on Bloomberg this morning: 1. Olympus (massive Japanese corporate fraud), 2. Berlusconi (budget vote on the Italian Job) and 3. Cain (to grope or not to grope, remains the question).


Alleged or not, there is a pattern here. Self Indulgence by 21st century central planners is really wearing on The People. When I write about Old Wall Street, I don’t mean old people – I mean the mentality, opacity, and process that is what these conflicted people do. Governments, banks, and their legacy media “contacts” are all intertwined like never before. The People get that too.


Good News: Wall Street 2.0 is going to change that. The truth is very difficult to hide on Twitter. How else would sources with no real names be building higher levels of credibility than both heads of state and the manic media correspondents who are tasked with being “connected” with them? Change is good.


Back to the Global Macro Grind


On October 4th(at the US stock market’s 2011 bottom), Harvard’s Ken Rogoff wrote an Op-Ed in the Financial Times titled “Debt, Deficits, and Deadlock: Welcome to 2012.” While I think Rogoff’s “This Time Is Different” is one of the most important empirical works in recent economic history, in the belly of his article he made a statement that blew my mind:


“…it is absurd to be worrying excessively about a 1970s stagflation.”


Notwithstanding the inflammatory wording of the statement, given the data that’s emerged in both recent history (and across the longest of long-term data in his book) that piling-debt-upon-debt-upon-debt with fiat currencies produces inflation, I have no other choice this morning than to highlight something many of these academics have a hard time dealing with – real-time market prices.

  1. Brent Oil prices are pushing back toward $115 (ie up +15% from the time of Rogoff’s article)
  2. WTIC Oil prices are pushing back above our long-term TAIL line of $93.88/barrel to $96.12 (up +23% since October 1st)
  3. Gold is moving back into a Bullish Formation (bullish TRADE, TREND, and TAIL), up +10% since early October

At the same time, European economic data continues to show classic signals of Stagflation (Slowing Growth, Accelerating Inflation):

  1. British Retail Sales drop -0.6% y/y in October (a 4 month low) as British GDP is tracking at 0.5% y/y w/ +5.2% inflation
  2. France’s Services PMI report dropped to a rock bottom 44.6 in OCT, signaling a recession in French Consumption Growth
  3. Italy’s inflation for OCT was +3.8% (vs +3.6% in SEP) as unemployment hit a new highs and GDP growth is signaling recession

Never mind the “absurdity about worrying about stagflation”, if oil prices remain near generational highs (using the 2008 all-time peaks is not what a long-term investor should be normalizing), there is a very high probability that Western Europe is entering an intermediate-term period of negative GDP growth and accelerating inflation growth (ie Stagflation).


Before the Keynesians hit the roof on these calculations (accepting responsibility for their policy recommendations? how absurd!), let’s bring in another market practitioner’s view. In his most recent monthly note titled “Pennies from Heaven”, Bill Gross asks a very simple question: “Can you solve a debt crisis by creating more debt?”


Of course not.


Why? Because, as Reinhart & Rogoff empirically prove in “This Time Is Different”, once a country crosses the proverbial Rubicon of 90% debt-to-GDP (Japan, USA, Italy, etc), creating more debt structurally impairs/slows whatever economic growth that was left.


So, as we worry about the worries of the day – the crises that politicians have created so that they can now save us from the “depression” of it all – remember that the US Treasury market has had this right all year long. Growth Slowing is structural. And, as a result, I’ll Self Indulge and ask Mr. Rogoff why it is so “absurd” to be “worrying” about these very probable Global Macro risks?


My immediate-term support and resistance ranges for Gold (Bullish Formation), Oil (Bullish Formation), German DAX (bullish TRADE; bearish TREND) and the SP500 (bullish TREND; bearish TAIL) are now $1745-1797, $93.88-96.28, 5894-6073, and 1255-1268, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Self Indulgence - Chart of the Day


Self Indulgence - Virtual Portfolio

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

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 80.46%
  • SHORT SIGNALS 78.35%


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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



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."

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.