Faulty Interventions

This note was originally published at 8am on November 11, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 $1756-1818, $94.21-98.46, 5699-6108, and 1226-1247, 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


TODAY’S S&P 500 SET-UP - November 16, 2011


Santa Claus is coming and we are sure all of this is going to end according to the central plan…


As we look at today’s set up for the S&P 500, the range is 32 points or -1.65% downside to 1237 and 0.89% upside to 1269. 






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance



  • ADVANCE/DECLINE LINE: +795 (+2380) 
  • VOLUME: NYSE 781.03 (+10.0%)
  • VIX:  +31.22 flat YTD PERFORMANCE: +75.89%
  • SPX PUT/CALL RATIO: 1.59 from 1.20 (+32.56%)



  • TED SPREAD: 45.54
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.06 from 2.04    
  • YIELD CURVE: 1.80 from 1.80


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage, (prior 10.3%)
  • 8:30am: CPI, est. M/m 0% (prior 0.3%)
  • 9am: Net long-term TIC flows, est. $50b (prior $57.9b)
  • 9:15am: Industrial production, est. 0.4% (prior 0.2%)
  • 9:15am: Capacity, est. 77.6%, prior 77.4%
  • 10am: NAHB housing, est. 18 (prior 18)
  • 10:30am: DOE inventories
  • 11:15am: Fed’s Lacker speaks on credit allocation in Washington
  • 12:45am: Fed’s Rosengren speaks on economy in Boston


  • Bank of America CEO Bryan Moynihan to tell board company is on right course – WSJ
  • Four NBA players sue league, its teams in federal court in Minneapolis - Minneapolis St. Paul Business Journal
  • Citigroup said to consider cutting as many as 3k jobs
  • John Paulson said to cut risk in his hedge funds further amid European debt crisi




COPPER – apparently Santa didn’t find his way to Asian Copper demand overnight either. Copper down -1% at 3.48/lb is just one more reminder of what it and US Treasury yields continue to remind us. Growth Slowing remains the issue, globally, that just won’t go away (especially with $100 oil).


  • Sino-Forest Faces ‘Herculean’ Task After Ponzi Scheme Denial
  • Sino-Forest Bonds Signal Timber Inflated by 100%: Canada Credit
  • Nationalism Tops Crisis as Key Risk to Mine Supply: Commodities
  • Maersk Poised to Benefit as Overcapacity Hits Rivals: Freight
  • Oil Drops From Three-Month High on U.S. Stockpiles, Europe Debt
  • Shale Oil Saps African Crude as Libya Returns: Energy Markets
  • Japan Buys 800,000 Tons Corn From Ukraine as U.S. Substitute
  • Copper Drops on Concern Europe May Fail to Contain Debt Crisis
  • Cotton Harvest in Australia May Jump 25% to Record on Area
  • Spring-Wheat Premium Widening Over Winter Crop: Chart of the Day
  • China Said to Buy 600,000 Tons of U.S. Soy to Boost Reserves
  • Galena Plans to Boost Staff 35% Next Year as Commodities Expand
  • Thailand to Buy 100,000 Tons of Rubber Stocks to Lift Price
  • Palm Oil Jumps to Five-Month High as Weather Threatens Supplies
  • Wheat Drops as Rain in Argentina, U.S. May Aid Crop Development
  • Sino-Forest Says Probe Refutes Muddy Waters Allegations
  • Gold Climbs for Second Session in Three as Investor Demand Gains
  • China Rare Earth Export Quota May Not Be Fully Used, News Says

THE HEDGEYE DAILY OUTLOOK - daily commodity view





THE HEDGEYE DAILY OUTLOOK - daily currency view





FRANCE – we covered our short position in French Equities yesterday because they were immediate-term TRADE oversold – managing risk around a refreshed 3037-3176 range in the CAC (which remains in a Bearish Formation) as does the Euro which is looking worse by the hour as our 1.37 TRADE line resist confirms.


THE HEDGEYE DAILY OUTLOOK - euro performance




CHINA – only problem w/ that fear (and it is a fear institutional investors are scared to miss) is that Asia isn’t getting the memo. China (down -2.5% overnight) and Hong Kong (we re-shorted EWH yesterday) down a stiff -2% taking the Hang Seng back into crash mode (-22% from YTD peak) as India continues lower as well.


THE HEDGEYE DAILY OUTLOOK - asia performance








  • Qatar Air Says ‘Belt Up’ as Middle East Carriers Pull In Orders
  • Airbus Draws With Boeing at Dubai Show Dominated by 777, Tirades
  • Bank of America Said to Cut Dubai Sales, Trading Team by 40%
  • Arab Project Finance Goes Local on Europe Debt Woes: Arab Credit
  • Indonesia Sale Supports Investment-Grade Rating: Islamic Finance
  • Obama Microphone Slip Shows Scary Israel Rift: Jeffrey Goldberg
  • ADCB Said to Sell Sukuk at 275-287.5 Basis Points Over Midswap
  • Oman Central Bank Plans to Sell $390 Million of Five-Year Bonds
  • Gas Exporters Seek ‘High’ Prices as They Cooperate on Supply
  • BBK Makes Exchange Offer to Holders of $152.4 Million of Notes
  • Australia, Iran, Iraq Advance in Asia 2014 World Cup Qualifying
  • Qatar May Buy Stake in Greece’s Ellaktor, Reports
  • Genel Energy Targets DNO to Boost Kurdish Oil Foothold
  • Schoeller Says Libya Oil Recovery May Match 5-Year Iraq Wait
  • Oil Tankers Loading in Persian Gulf at Lowest Since June
  • Qatargas Providing Extra 9 Million Tons of LNG to Japan
  • Qatar Seeks Stakes in Russia’s Novatek, Yamal LNG Project
  • Rio Seeks to Boost Aluminum Production in Oman: Company Link
  • Qatar Air CEO Makes Up With Airbus After Lashing Planemaker                

The Hedgeye Macro Team

Howard Penney

Managing Director


Early Look

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Instructing The Masses

“If the masses were going to run the world, they would need a lot of instruction.”

-Sylvia Nasar


That’s a quote from Nasar’s recently published book “Grand Pursuit” where she explains how one of Yale’s “great men”, J. Willard Gibbs (chemist, mathematician, physicist), thought about a globally interconnected world at the turn of the 20th century (page 147).


The late 1800s and early 1900s were a very formative time for the study of economics. That’s when mathematicians got involved. Quantifying the qualitative is important. The fear-mongering styles of Malthus, Carlyle, and Marx were replaced by new lines of thinking from the likes of Marshall, Schumpeter, and Fisher. Re-thinking was good.


Since then, we’ve had a long, hard, muddle through nerdy economic debates about Hayek vs Keynes, Rand vs Bureaucrats, and Capitalism vs Socialism. But we really haven’t evolved the process by which we apply modern day math (Chaos and Complexity Theory) to how we’re thinking about economies and markets.


Since Chaos Theory is the most relevant mathematical conclusion since relativity, I think there is plenty of re-working and re-thinking to be done. Instructing The Masses on how markets work will take time. It’s time that I am personally willing to make.


Back to the Global Macro Grind


One of the gaping voids that’s obvious to anyone who has studied a Yale or Princeton economics textbook is the behavioral side of markets that plays such a critical role in the decision making of market participants. Kahneman, Tversky, and Taleb have all contributed significantly to qualifying the impact psychology has on markets, but we are still in the very early days of applying these learnings.


Quantifying sentiment is very difficult. I’ve been on the road seeing clients from Denver to Kansas City to San Diego, Boston, and New York in the last 6 weeks – and the #1 question I get is “what are you hearing.”


What I am “hearing” and what my risk management models are seeing are quite often very different things. But since our industry has effectively become one gargantuan front-running exercise of trying to beat the market’s beta, it’s a question that modern practitioners of asset management have to constantly evaluate.


What’s sentiment right now?


Well, from a Global Macro perspective, there’s not one answer that fits nicely in a baby blue box with a Tiffany bow on it. Sorry. Asian stock markets continued to fall, hard, last night. China was down another -2.5%, and India remains under inflation’s pressure (Sensex down another -0.6%). The Euro, European Bonds, and European Equities remain a mess.


From a US stock market “sentiment” perspective, one of the best contrarian readings I can give you is measured by looking at the spread between Bulls and Bears in the II Survey (comes out every Wednesday):

  1. In late September, the spread was bearish (meaning more Bears than Bulls) on the order of -1900 basis points (19%)
  2. After October’s rally (the biggest ever in US stock market history), the Bullish to Bearish spread flattened to even
  3. This morning, the spread has widened to +1500 basis points (Bulls 47.4% minus Bears 32.6% = +15%)

And while that’s only 1 factor I’m observing in my multi-factor, multi-duration, risk management model – my spidey senses say that sounds just about right. Hedge Funds fear being short. Mutual Funds fear missing Santa Claus. Central planners fear-monger.


Back to where I started this morning’s note, I think we’re a lot smarter than staring at the futures on TV this morning looking for an emotional direction. Mediocre minds are not going to lead us anywhere but lower. We need to be the change we all want to see in our analytics.


While Big Government Interventionists and the ad dollars that support them think that all of this is going to end according to their central plan, globally interconnected markets have a not so funny way of getting in the way of that…


My Top 3 globally interconnected points confirming Asian, European, and North American stock market weakness this morning are:

  1. Chinese Demand: Hong Kong trading down -2% well below TREND line support of 20,297 on the Hang Seng
  2. Dr Copper: down another -1% to $3.48/lb, remaining in what we call a Bearish Formation (bearish TRADE, TREND, and TAIL)
  3. US Treasury Yields: continue to signal that both US and Global Growth are slowing (TRADE resistance for 10-yr yields = 2.15%)

Of course the Euro collapsing versus the US Dollar remains the #1 Correlation Risk factor affecting Global Macro markets. But you already know that – because our Instructing The Masses since founding the firm in 2008 has been consistently backed by the math.


My immediate-term support and resistance ranges for Gold, Oil, France CAC, German DAX, and the SP500 are now $1, $96.92-100.33, 3037-3176, 5, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Instructing The Masses - Chart of the Day


Instructing The Masses - Virtual Portfolio


Investors that put dollars behind the notion that “they can’t comp the comp” or “this will be the same old Brinker” will get run over, in my opinion.  I feel good about this one.


Outside of macro issues like consumer confidence, the lack of job growth and commodity pressure the restaurant industry is not in a recession.  There are companies that are struggling, but it's a great time to be taking market share and Chili’s is one of the brands that are best-positioned to take significant share.  As we recently saw from Olive Garden’s response to the $6 lunch, Chili’s does not just compete in the “Bar and Grill” space; the broader industry reacted to this price point.   


The title of this note sums up my thoughts coming out of the Brinker analyst meeting in Raleigh, N.C., this weekend which was one of the best EAT analyst meetings I have attended.  It was a great meeting for two reasons.  First, having the entire senior management team at the meeting in an actual restaurant where so many of the initiatives could be explained and debated sent a strong signal.  Second, the meeting was well-attended by a number of Brinker employees with varying skills and experience-levels that helped bring the whole picture together.


In terms of the sell-side community, the meeting was not very well-attended.  For me, this was an important meeting from which I gained a lot of insight.  I would find it hard to believe that any attendee could leave that meeting not feeling impressed by the Chili’s transformation and how it is playing out.


Brinker is another restaurant company that I have been covering for nearly 20 years.  I have seen the company transform many times from small cap Casual Dining start-up; Chili’s revitalization 1.0; the failed multi-brand company strategy; to a weakened industry leader that grew too fast and now on to the “industry innovator” and Chili's revitalization 2.0 we are seeing today. 


Say what you want about the management team, Brinker’s CEO, Doug Brooks is a survivor and now thriving under the new business model.  I also consider Doug one of the strongest CEOs in the industry and the survivor mentality is coming through in the in corporate philosophy of better before bigger. 


It also important not to lose sight of the fact that over two years ago, Doug brought in a new management team with fresh thinking to embark on Brinker’s new path.  Over the past three years, he has sold off non-core brands, bought back 20% of the stock and are now in the middle of what could be one of the most significant brand rejuvenations I have seen in casual dining.  There is a still lot of work to do but the pieces of the puzzle are in place. 


I remember walking out of the analyst meeting in March of 2010 and thinking they have finally found a way to have a real competitive advantage in the bar and grill space, but it could be bigger than that.  At that time, the story was about cutting margins and perhaps stabilizing sales trends but the investment community gave management no credit for technological advances which were, at the time, conceptual at best.  We are now seeing it come to life in the restaurant.


Management perfectly illustrated the impact of the restaurant innovations by displaying slides of time and motion studies that highlighted the difference between how crews work in the new kitchen versus the old kitchen.  The new equipment (ovens etc) simply the back-of-the-house processes and also allow more flexibility in terms of what the restaurant can serve.


Taken together, it’s all about improving margins, creating “less stress” for the employees, lowering labor costs and improving the food quality for the guest.  All of the above leads to more money in the pocket for the store managers!  Not a bad formula! 


While they have accomplished a lot since then from a margin stand point, the "technology" part is just coming to life now.  The sell-side is not giving them credit, because all of these “intangibles” are unquantifiable, so trying to imply what it means for same-store sales is an unknown - at this point.  The options the back-of-the-house technological improvements provide the concept with are more varied than I thought.  The Combi oven is a steamer/oven that allows the staff to cook ribs and pasta and is also self-cleaning.  The CTX oven is a conveyer-belt style oven that cooks quesadilla and other items and the Impinger oven allows the staff to cook flatbread and pizza.  There are many other platforms that the new technology opens to the company and, from a competitive standpoint, the Chili’s store-base will be peerless from a kitchen-technology standpoint.


With respect to this menu innovation, the meeting provided us with a chance to experience the new kitchen’s capabilities first-hand.  For part of the meeting we became guinea pigs in make shift “test kitchen” as the culinary team came to life showing us how that can use the technology to innovate the food.  In the coming years it’s likely that we will see food platform around pasta, flat bread dishes, pizza, fish and chicken. 


If you are a brand like Chili’s in a highly competitive segment like Casual Dining, looking to create new news that your competitors will not be able to replicate will be a real advantage.  My guess is that EAT has a multi-year head start on the competition and most of the smaller players will possibly never be able to compete.   Additionally, if a company is 95% franchised, it may be difficult to orchestrate such a system-wide overhaul as Chili’s is doing.


Judging by the type of questions being asked after the tour of the kitchen, there were some analyst that were starting to think a little differently.  People were asking questions like, “how long will it take for the competition to catch up to you?” and “Who else is putting this technology to work?”  This is the third time I have toured the “kitchen of the future” and I pick up new insights each time.  It is a game-changer for the Chili’s brand. 


The company did not change guidance and reiterated its capability to achieve  400 basis points of net margin improvement from its Plan to Win.  Given that they are half way home the numbers seem very believable at this point.  It's interesting that those detractors who were negative from the outset have now drifted their thesis to assume that the margin improvements are unsustainable and will compromise the customer experience.  I am extremely confident that the opposite is true and, unlike some detractors, I have taken significant time to investigate and analyze the company’s strategy and how it is being executed.   Management is confident, the staff is more content and less stressed and store managers are highly galvanized. 


I think the Chili’s momentum is real and will persist for quite some time.



Howard Penney

Managing Director


Rory Green



Trade Update: Santa Claus Isn’t Coming to Hong Kong This Year

Conclusion: We are fading consensus calls for Santa Claus by shorting Hong Kong as the domestic and global macro fundamentals are likely to continue deteriorating over the intermediate term. 


Position: Short Hong Kong Equities (EWH)


Earlier today, Keith shorted the Hong Kong equity market in our Virtual Portfolio. Putting on exposure to this increasingly high-beta market is a sign of our conviction in our research, specifically in our thesis that global growth is continuing to slow – particularly across Europe and Asia. Irrespective of consensus calls for a monster beta-chase into year-end, our proprietary analysis suggests that global macro fundamentals are highly likely to continue deteriorating over the intermediate term TREND and shorting Hong Kong remains one of our favorite ways to play this view.


It’s worth noting that when the same people (i.e. consensus) are telling you that “all the bad data is priced in, so stocks must go up” are the same exact people that told you “everything is fine, so stocks must go up” six months ago, you should be, at a minimum, concerned.


Going back to Hong Kong specifically, it has remained one of our top Asian short-ideas since May for the following factors: 

  • A) Pronounced domestic stagflation will continue to compress corporate earnings growth over the intermediate term;
  • B) An inflecting property market will weigh on credit quality across the banking sector; and
  • C)  Slowing global growth will weigh on Hong Kong economic growth, which is among the world’s top two trade-oriented economies. 

Point A:

Trade Update: Santa Claus Isn’t Coming to Hong Kong This Year - 1


Point B:

Trade Update: Santa Claus Isn’t Coming to Hong Kong This Year - 2


Point C:

Trade Update: Santa Claus Isn’t Coming to Hong Kong This Year - 3


We encourage you to review our recent work on this idea and the associated thematic analyses: 

Lastly, our proprietary quantitative risk management levels are included in the chart below.


Darius Dale



Trade Update: Santa Claus Isn’t Coming to Hong Kong This Year - 4

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