European Risk Monitor: Heads Will Roll

Positions in Europe:  Short EUR-USD (FXE); Short France (EWQ)

Crowds cheered the news of Italian PM Silvio Berlusconi’s resignation and Mario Monti’s appointment on Saturday, however let’s not forget what’s left in the balance—public debt at 120% of GDP; pushback on austerity that will not help to curb the deficit; a technocrat government in which new elections aren’t scheduled UNTIL early 2013; debt maturities north of €200 Billion over the next 6 months; poor growth prospects that should result in declining tax revenue; worries about core Italian bank leverage to European sovereign paper; rising government bond yields increasing the cost to raise capital; and market participants looking for a quick fix to Italy’s (and the rest of Europe’s) problems with a quick flick of the wrist.


The Italian economy and more broadly European capital markets are going to need Super Mario to save the day—well frankly, we don’t think Mario squared (+Mario Draghi) can save the day. Don’t forget that we don’t have any major planned catalysts into year-end around which Europe’s unanswered questions: expansion (leverage) of the EFSF, bank recapitalization, Greek haircuts will be solved for.


Talks that China would come to Europe’s rescue have faded—not surprisingly given the less obvious benefit to them—and the expansion of the role of the ECB and IMF are still undecided.


Today, at her Christian Democratic Union party’s annual congress in the eastern German city of Leipzig, German Chancellor Angela Merkel told leaders they must create a “new Europe” by deepening ties in the 27-nation EU, yet reiterated her rejection of jointly sold euro bonds.


She said:  “The task of our generation now is to complete the economic and currency union in Europe and, step by step, create a political union… It’s time for a breakthrough to a new Europe…  If the euro fails, Europe fails.”


In response, we don’t want to discount the resolve of Eurocrats to maintain the Eurozone project—after all the last two years have proven this out well—however we do want to sound the horn that the credit markets are telling a very different story around the risk of this very project.  And more rhetoric without action is going to see investors punish most European capital markets.


Our weekly European Risk Monitors are included below. We remain short the EUR-USD via (FXE), which remains broken TRADE ($1.37), TREND ($1.42), and TAIL ($1.40), and short France (EWQ) in the Hedgeye Virtual Portfolio. For more specifics on both positions, see our recent work on the Hedgeye portal.



European Sovereign Yields – European 10YR yields were mostly higher last week. Greek yields shot up 228bps, Spain +44bps, Italy +35, while Portugal declined -62bps and Germany -12bps. As always, we’re keying off the 6% Lehman line as a critical breakout line. Italy has held tight above the 6% for the last three weeks, currently at 6.57%.


In its SMP bond purchasing program, the ECB bought €4.5 Billion in secondary bonds last week (vs €9.5B in the week prior), taking the total program to €187 Billion. Look for Super Mario (Draghi) to increasing buying alongside heightening Italian yields.


European Risk Monitor: Heads Will Roll - 1. me


European Sovereign CDS – European sovereign swaps mostly widened last week. Spanish sovereign swaps widened by 7% (+28 bps to 427) and French by 11% (+20 bps to 202). 


European Risk Monitor: Heads Will Roll - 2. me


European Risk Monitor: Heads Will Roll - 1. x


European Financials CDS Monitor – Bank swaps were wider in Europe last week for 32 of the 40 reference entities. The average widening was 6.2% and the median widening was 11.5%.   The German bank Bayerische Hypo- und Vereinsbank saw swaps widen by almost 30%. In addition, the four Italian banks we track saw swaps widen an average of 18%. 


 European Risk Monitor: Heads Will Roll - 3. me


Matthew Hedrick

Senior Analyst

Bearish TAIL: SP500 Levels, Refreshed



My position on the long-term TAIL being broken is, at a bare minimum, consistent.


So is my process. I run a core 3-factor model to measure the range of risk – PRICE, VOLUME, and VOLATILITY. Friday’s VOLUME was -27% below my immediate-term TRADE duration average. That, combined with a Bullish Formation in VOLATILITY, is bearish for US Equities, from this price.


Across durations, here are the lines that matter most right now: 

  1. TAIL = 1269 (resistance)
  2. TRADE = 1253 (support)
  3. TREND = 1227 (support) 

In other words, watch 1253 today/tomorrow very closely. We think the inflation data (US PPI and CPI) will come in higher than expected (Tuesday/Wednesday). That should keep Bernanke in a box, and upward pressure on the US Dollar.




Keith R. McCullough
Chief Executive Officer


Bearish TAIL: SP500 Levels, Refreshed - SPX

Political Calendar Is Quiet, But Still Important to Keep Front and Center Through Year-End

Below we’ve outlined the key U.S. political events through year-end.  With Congress out of session, the calendar is dominated by appearances from President Obama and the continued series of Republican presidential nominee debates. 


In the shorter term, of course, November 23rdis the deadline for the deficit reduction Super Committee.  Currently, according to InTrade, the odds are 16% that the Super Committee comes to an agreement and issues a recommendation by midnight on November 23rd. We will be publishing a note shortly on the increasingly likely scenario that the Super Committee fails, but that date should be kept in focus.




NOVEMBER 15, 2011

  • Shared Services for Government, Healthcare & Higher Education (Chicago Illinois)
  • CNN / Heritage Foundation / AEI Debate

NOVEMBER 16, 2011

  • Obama visits Australia
    • Discuss expanded military ties

NOVEMBER 18, 2011

  • Obama in Indonesia (17th-19th) for Association of Southeast Asia Nations (ASEAN) Summit

NOVEMBER 19, 2011:

  • Louisiana - Gubernatorial General Election
  • GOP Presidential Forum /Thanksgiving Family Forum (Des Moines, Iowa)
    • Participants: Bachmann, Cain, Gingrich, Paul, Perry and Santorum all confirmed, Romney unconfirmed

NOVEMBER 22, 2011

  • GOP Presidential Debate hosted by CNN (Washington, DC)
  • State unemployment rates for October will be released

NOVEMBER 23, 2011

  • Deadline for super committee to reach a deal, or automatic cuts will immediately be put in place
  • Jobless Claims
  • Consumer Sentiment

NOVEMBER 30, 2011

  • GOP Presidential Debate hosted by Arizona Republican Party and CNN (Mesa, Arizona)
  • Productivity and Costs Release (Q3)

DECEMBER 1, 2011

  • CNN / Arizona GOP Debate

DECEMBER 2, 2011

  • Obama will host 2011 White House Tribal Nations Conference

DECEMBER 8, 2011

  • Deadline for Secretary of State’s office to certify general election results

DECEMBER 10, 2011

  • GOP Presidential Debate hosted by ABC News and the Iowa Republican Party (Des Moines, Iowa)

DECEMBER 12, 2011

  • President Obama welcomes Iraqi Prime Minister Nuri al-Maliki to the White House

DECEMBER 14, 2011

  • President Obama is a confirmed speaker for the Union for Reform Judaism Biennal (14th-18th)

DECEMBER 15, 2011

  • GOP Presidential Debate sponsored by Iowa GOP and Fox News (Sioux, Iowa)
  • Global Conference on Global Business and Global Economy (Detroit, Michigan)

DECEMBER 19, 2011

  • GOP Presidential Debate hosted by the Des Moines Register, PBS NewsHour, Iowa Public Television, Google, and YouTube (Des Moines, Iowa)

DECEMBER 20, 2011

  • State unemployment rates for November will be released

DECEMBER 27, 2011

  • FOX News / Iowa GOP Debate Sioux City, IA

Daryl G. Jones

Director of Research


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November GGR forecast revised up to HK$21-22BN



This past week, average daily table revenue increased sharply to HK$781 million versus HK$639 million last week.  We expect the current week to slow again since many VIP players stay away from Macau during the Grand Prix celebration (race is on Saturday).  However, with Cotai somewhat immune to the congestion, the slowdown may not be as pronounced as in prior years and we should see a market share shift away from the peninsula.  We are projecting full month GGR (including slots) of $21-22 billion (+25-31% YoY) with a bias at the high end of that range.


SJM was the clear market share winner, a nice reversal from last year’s hold-affected decline.  We think SJM is holding around 3.5% month to date.  On the low end, MPEL held around 2.5% at both Altira and CoD so far in November, dragging down overall share.  MPEL bears should control their enthusiasm, however.  We think MPEL is on pace for over US$200 million in EBITDA and over US$220 million in hold adjusted EBITDA.  Street consensus is only US$195 million.  









A glut in wheat prices is set to lead prices lower, according to Bloomberg, as exporters fight for sales.  France, in particular, is suffering as Ukraine can export wheat to northern Africa – an important export market for France – as much as $10-15 cheaper than the French can.






THE HBM: DNKN, GMCR, MCD, SBUX, DRI, OSI - subsectors fbr





DNKN: Dunkin’ Brands has announced that JP Morgan, Barclays, and Morgan Stanley are waiving a lock-up restriction with respect to up to 732,758 shares of the company’s common stock.  The waiver will take effect on November 16, 2011, and the shares may be sold on or after such date, subject to the terms of the waiver.

GMCR: Green Mountain Coffee was cut to Hold from Buy at Argus Research.


MCD: McDonald’s aims to “at least” double coffee sales in Germany over the next four years according to the Financial Times Deutschland.


MCD: McDonald’s was maintained overweight at Barclays.


SBUX: Starbucks has raised over $1 million in donations within the first two weeks of its Create Jobs for USA Fund program’s launch.





DRI: Darden featured in Barron’s this weekend where the publication, citing Goldman Sachs research, said the shares could rise to $60 due to a combination of new unit growth on college campuses and airports and pricing. Goldman’s PT is $53.


OSI: OSI Restaurant Partners LLC, parent to Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and other casual-dining chains reported a larger net loss for its third quarter despite strong top-line trends.  Domestic system-wide same-store sales rose 5.6% at Outback Steakhouse during the quarter.



THE HBM: DNKN, GMCR, MCD, SBUX, DRI, OSI - stocks 1114



Howard Penney

Managing Director


Rory Green



Clever Confusion

This note was originally published at 8am on November 09, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 $1756-1808, $94.01-97.07, 5685-6019, and 1216-1268, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Clever Confusion - 1. EL EUR


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