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TODAY’S S&P 500 SET-UP - November 14, 2011


Super Mario II not having the impact some hoped he might...

As we look at today’s set up for the S&P 500, the range is 21 points or -1.25% downside to 1248 and 0.41% upside to 1269. 












  • ADVANCE/DECLINE LINE: +2177 (+1016) 
  • VOLUME: NYSE 762.30 (-15.31%)
  • VIX:  +30.04 -8.44 YTD PERFORMANCE: +69.24%
  • SPX PUT/CALL RATIO: 1.48 from 1.96 (-24.55%)




BOND YIELDS – Italy issued another roll of piig paper at 6.29% (5yr!), so the bond market continues to have European Stagflation right as the US Treasury market has Growth Slowing (Q4 vs Q3) right; immediate-term TRADE line of resistance for UST 10yr yields = 2.13%.

  • TED SPREAD: 45.22
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.04 from 2.00    
  • YIELD CURVE: 1.80 from 1.76


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: NOPA monthly oil stocks
  • 11am: Weekly export inspections: corn, soybeans, wheat
  • 11:30am: U.S. to sell $29b 3-mo., $27b 6-mo. bills
  • 4pm: Weekly crop conditions


  • Banks adding fees under the radar – NYT
  • Mitsubishi UFJ Morgan Stanley Securities to privately place ¥40-50B of shares this month – Nikkei
  • AMAZON.com willing to lose hundreds of millions of dollars annually on Amazon Prime – WSJ
  • Iraq threatens to kick Exxon Mobil out of country - Independent on Sunday
  • Former EU Competition Commissioner Mario Monti will head a new Italian govt after Prime Minister Silvio Berlusconi resigned.
  • German Chancellor Angela Merkel said EU must forge closer union to send a message to bondholders that leaders are serious about ending the sovereign debt crisis




  • Hu Pledges More China Imports as IMF’s Zhu Sees ‘Soft Landing’
  • Oil Trades Near Highest Since July as Italy Rebuilds Government
  • Wheat Shippers Fight for Sales as Grain Glut Grows: Commodities
  • Ethanol Futures at Records as U.S. Ousts Brazil: Energy Markets
  • Gold May Gain as New European Leadership Limits Dollar Demand
  • Iron Ore Seen Extending Advance on Chinese Steelmaker Demand
  • Sugar Harvest in India Seen Missing Forecast as Yields Drop
  • Copper Extends Gains on New European Leadership, Stockpile Drop
  • Rusal’s Third-Quarter Net Jumps 15-Fold, Beating Estimates
  • Nickel Surplus May Jump to Most in Four Years on Slow Demand
  • Palm Oil May Advance to 4,000 Ringgit by June, Mistry Says
  • Codelco Said to Offer Copper Premium at $110 to China Buyers
  • Copper Jumps Most in Two Weeks on Japan’s Growth: LME Preview
  • MF Trustee Fires Entire Broker-Dealer Workforce of 1,066
  • Rubber Jumps Most in 8 Months as Car Output Resumes After Flood
  • Aditya Birla Group Said to Make Bid for Aquila’s Washpool Mine
  • Goldman Sees Commodity Prices Rising 15% in Next 12 Months
  • Gold May Decline in London on Reduced European Debt Concern





EURO – Goldman made the call to buy the Euro on Friday, so we shorted it. We’re long the US Dollar and looking forward to Super Mario I (Draghi) being politicized to cut rates to zero = bad for the Euro, as is failing at this 1.37-1.38 TRADE zone of resistance






CAC – France is where we want to be focusing our positioning as the media focuses where we’d been. Italy still matters obviously, but the French banks are in a much more precarious position. CAC fails, again, at the only line of support it had left (3169 TRADE line) as the MIB index does the same (fails at 15988 TRADE resist)












  • Boeing’s Record Emirates Deal Cements Wide-Body Lead Over Airbus
  • Jibril Turns Against Foreign Powers That Aided Qaddafi Overthrow
  • Syria Calls for Summit Meeting After Arab League Suspension
  • Republican Answers on Iran Nukes Face Same Reality as Obama’s
  • Dubai Sukuk Yield Rises to Month High on Europe: Islamic Finance
  • Dana Gas Working With Banks on Refinancing $1 Billion Sukuk
  • Airbus to Sign Qatar Airways Order Worth $6.5B, La Tribune Says
  • Abu Dhabi Commercial Bank Said to Plan U.S. Dollar Sukuk Sale
  • Dana Gas Net Quadruples to 143 Million Dirhams on Oil Prices
  • Iraq to Recognize Kurdish Oil Deals With Foreign Explorers
  • Yemen Seeks $4 Billion as Recession Worsens Crisis: Arab Credit
  • Afren Rises After Completing Nigerian Oil Asset Purchase
  • Iran Rejects Bahrain's Claim of Terror Cell Links
  • Marfin Invest, Abu Dhabi Mar Reach Agreement on Investments
  • Orascom Telecom Reports Third-Quarter Loss of $975,000
  • Iraq Government Says Accord Made With Kurds on Oil Contracts
  • Gulf Keystone Plans to Ship 20,000 Barrels a Day From Kurdistan


The Hedgeye Macro Team

Howard Penney

Managing Director



Lazy Conformism

“This lazy conformism is one of the big dangers of this country today…”

-Siegmund Warburg


In Niall Ferguson’s “High Financier”, that’s what Warburg had to say about British political leadership in 1957. “There is a frightening amount of mediocrity … and there should be a crusade against complacency…” (page 136).


In 2011, anytime we call Old Wall Street out on these types of structural issues, they either block us or get really upset. That means we’re being the change we all want to see in this business. Groupthink is dying on opacity’s vine.


If the American financial empire wants any chance at seizing this global debt crisis as an opportunity to change, we better start now. Post WWII Britain had to learn this lesson the hard way - time is not an entitlement.


Back to the Global Macro Grind


Pressure packed with volatility and hope, last week was exciting. While hope is not a risk management process, fading the market’s beta is – and we’ll look for direction from King Dollar on that front once again this week (we have a 12% asset allocation to the US Dollar Index in the Hedgeye Asset Allocation Model).


Week-over-week Macro moves:

  1. US Dollar Index $76.94 = flat
  2. Volatility 30.04 = flat
  3. Commodities 320 (CRB Index) = flat

That’s a lot of flat.


In US Equities, the message wasn’t as flat:

  1. SP500 = up +0.8%
  2. Nasdaq = down -0.3%
  3. Russell2000 = down -0.3%

But, this weekend, there was a Lazy Conformism in analyzing what, precisely, all of this interconnectedness might mean to Global Macro investors. I saw a lot of pundits go as far as to say things like ‘when you really think about it, US stocks are flat this year.’


If you really don’t think about anything at all, that probably sounds right. Who needs to analyze anything or charge a fee for proactive anything if we could have all just closed our eyes during a +101% rip in Volatility (VIX) since May, and gone back to bed?


Whether it’s the Nasdaq or Russell 2000 having closed down for the last 2 weeks or US Treasury Yields dropping to 6-week lows as the SP500 tries to sustain low-volume 6-week highs, there is plenty to think about. Excellence in your risk management process is required.


Being excellent is ok. So is not losing money. In fact, for my money, that’s Rule #1 in this game – and rather than subscribe to some form of centrally planned mediocrity in this business that dares people to chase yield, we’re going to stick with what’s been working since late 2007.


Since making lower long-term and intermediate-term highs:

  1. The SP500 is down -19.3% since October 2007
  2. And down -7.3% since April 2011

Lower long-term highs in stock prices with higher long-term lows in volatility is what’s crushing both the economic cycle and investment returns. The Old Wall and Washington’s analysis of as much is broken.


Change needs to happen now. And no, hiring a lifer bureaucrat and Keynesian economist to run Italy isn’t the change Americans want to see in this world. Out with the whiners - Americans want to start winning again.


My immediate-term support and resistance ranges for Gold (bullish), Oil (bullish), German DAX (bearish), French CAC (bearish), and the SP500 are now $1, $95.39-99.89, 5, 3047-3176, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Early Look

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The last note I wrote about COSI was titled “Destruction in Deerfield.”  In breaking down the company’s recent letter to Brad Blum it appears now that management is in desperation mode and will do anything possible to keep their jobs, even if it is to the detriment of the company.


On the day the management reported another disastrous quarter, management felt the need to send Brad Blum a letter stating their dissatisfaction with Mr. Blum and his campaign to get the company back on track. 


The letter comes across as a desperate attempt to discredit Mr. Blum, without providing any reasons why shareholders should support the current management team and their efforts, or lack thereof, to turn the brand around.


The earnings call was an awkward event; it was clear that there was no vision for the future.  The experience must have been uncomfortable for the management team, given that no participants on the call seemed to be convinced by what the executives had to say.


I have broken down the letter to Mr. Blum and added my take on what it all means:


COSI Board: “As we have said to you on several occasions, including our two recent face-to-face meetings, we would welcome your offers of assistance if only they were sincere.  Believe us, we appreciate fully the frustration of our fellow shareholders.”


HEDGEYE: Why would management think that someone who owns 6.7% of the equity would not be sincere?  How can they appreciate the frustration of fellow share holders when they (collectively) own less than 1.5% of the equity?  As I see it, the use of the word “sincere” is disingenuous; they just want to keep their jobs!



COSI Board: “This Board is conducting an aggressive but deliberate search to identify a new leader for our company.  We are searching for a CEO who brings vision, a passion for our brand, operating excellence and a track record of success.  We have met several excellent candidates and hope to conclude our search shortly.  Sadly, your so-called activist activities have only complicated our efforts and kept several promising applicants on the sidelines.”


HEDGEYE: Did management not read the letter from James A. Skinner from Royce Associates, which owns 9.6% of COSI?  Here is a small excerpt: “I am also writing to express our dissatisfaction with the Board's and Management's performance over the last several years. Whether measured by the company's revenue growth, profitability (or lack thereof), cash management, capital allocation and share price performance, COSI has fundamentally been an underperforming entity for the better part of a decade.” 


I guess there are now two (as management says) “so-called” activists.  Brad Blum is not complicating the efforts to find a CEO, because he should be the CEO and most qualified observers know that.


COSI Board: “Your demand to hand-pick the majority of the board and thus control Cosi as a precondition to your willingness to serve as CEO or as a director would in effect ask shareholders to deliver to you control of their company as the price for your services.  Shareholders are paid for changes in control, not the other way around.”


HEDGEYE: I love this statement.  Does management have an inflated view of what the company is worth?  What would you pay for a company that is bleeding cash, needs $7-10 million in capital to survive and management team that can’t articulate a vision of the future?  The current shareholders are getting paid a premium with the stock at $0.73.  If the Board appoints any CEO other than Brad Blum the stock will likely be down 30-50% and the bankruptcy clock will start ticking.     


COSI Board: “Believing you to be sincere in your offers of assistance, we heard you more than once say that you would not insist on such a preposterous governance structure.  In that belief, we interviewed you in Winter Park for the CEO position.  We also met with you in Chicago to discuss your joining our board.  Each time, we hoped that your offers of help were sincere.  Each time we discovered they were not and that you continue to insist that the only way you would serve as CEO is if we turned over control of the company to you.  We cannot do that.”




COSI Board: “During our two face-to face meetings, you failed to present any new ideas and plans for improving Cosi’s products and services, improving Cosi’s marketing program, expanding the Cosi  brand, accelerating Cosi’s revenue growth, enhancing stockholder value and, of course, achieving and maintaining profitability.  Rather, your major suggestion was to move the Company’s headquarters from Chicago to Orlando, Florida, where you reside, a concept that would be both expensive and counterproductive to the operations of the Company.”


HEDGEYE: Again this appears to be a statement is intended to discredit a restaurant executive with a track record that the brand needs.   Also, who are they to talk – the losses continue to mount every quarter!  It should also be noted that the current Blum proposal does not actually suggest the company move to Orlando, Fla.


COSI Board: “We also discovered other concerns.  In evaluating your candidacy, we spoke with several references.  Many spoke of your arrogant management style, your lack of fiscal responsibility and the string of failures that followed Olive Garden.  We were also surprised by your statement the other evening that you, while CEO of another Company, “manipulated” the comparable store sales in order to portray a story of consistent quarter over quarter growth.  Your duplicitous behavior, your public rants and your disregard for the federal securities laws in your dealings with us and our shareholders only heighten these concerns.”


HEDGEYE: The clock in running out and there are no other options but to throw a Hail Mary and cross the line of integrity and accuse Mr. Blum of violating securities laws!  Blum has offered quantifiable evidence of shareholder discontent by conducting a survey of COSI shareholders and all that management can respond with is hearsay and insults.


COSI Board: “Brad, our shareholders deserve more than self-promotional gimmicks   A veiled takeover by a wanna-be “activist” trying to make a name for himself at the expense of their company really isn’t in the best interest of our shareowners.  This Board of Directors is made up of serious business people whose motives are very straightforward.  We are not motivated by the meager financial rewards of the job.  We are not motivated by empire-building or some self-interested agenda.  We are motivated by our sincere commitment to providing the best available options for our fellow shareholders and to doing the job we agreed to do.”


HEDGEYE: Mr. Demilio, the shareholders deserve a chance to have a real restaurant executive run this company. 



Howard Penney

Managing Director



The Week Ahead

The Economic Data calendar for the week of the 14th of November through the 18th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - 1. cal

The Week Ahead - 2. cal

the macro show

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.