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Could Santa’s Sack Be Filled With Coal?

Conclusion: Don’t get too excited by the centrally-planned easing of financial conditions this morning. History suggests, if anything, they are likely to be a precursor to deteriorating economic data and financial market conditions.


It is not a secret that our intermediate term outlook for the global economy is somewhat dour based on an outlook of tepid economic growth and sticky inflation. The question now, of course, is whether today’s coordinated policy actions should change that. For our thesis to change, today’s action would have to change the outlook for either inflation or growth.


For starters, with consensus focused squarely on the central planning of central bankers in hopes that it will ignite the year-end Santa Claus rally, we thought it might be value-add to offer some contextual analysis around what just happened.


Per the Federal Reserve’s monetary policy press release from today:


“The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity… These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.”


This sounds vaguely familiar to their September 18, 2008 press release:


“Today, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing coordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets. These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets. The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures… The Federal Open Market Committee has authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks… All of these reciprocal currency arrangements have been authorized through January 30, 2009.”


Appropriately based on this policy action, and as highlighted in the chart below, the Fed Dollar liquidity swap line rate has adjusted from 1.1% to 0.6% in short order, which will allow cheaper access to U.S. dollars for the cash-strapped European banks. Ironically, the noteworthy takeaway here is that assuming a constant U.S. dollar OIS rate and flat discount rate of .75%, when the Fed’s new measures kick in on December 5th it will be roughly 15 basis points cheaper for European banks to borrow U.S. dollars from the ECB than for U.S. banks to get them from the Fed. 


Could Santa’s Sack Be Filled With Coal? - 6


Equity Market Context

Accepting the fact that this is 2011 and NOT 2008 (an assertion we’ve maintained throughout the year), looking at a chart of the “market reaction” to the 2008 action, we saw the S&P 500 rip +98.7 points (or +8.5%) higher in a span of just two days.


Could Santa’s Sack Be Filled With Coal? - 1


The “market”, of course, went on to fall -578.55 points (or -46.1%) from the centrally-planned lower-high to economic reality nearly six months later.


Could Santa’s Sack Be Filled With Coal? - 2


As it relates to today’s market action, the SP500 ended the day up +51 points. Interestingly, the commodity markets are showing little of the return to risk on as WTI oil is only up 0.70% and the CRB index, more broadly, is only  up +1.09%. So, interestingly while there is clear shift into equities, we are not seeing the same follow through into commodities, which would imply that the outlook for economic growth has not been altered meaningfully as a function of this concerted policy action.


Credit, Funding, and FX Market Context

In terms of the credit markets, the reaction also seems to be somewhat tepid. The yield on the Italian 5-year bond, a good proxy for the European sovereign debt issues, closed at 7.5%, which was down only marginally on the day by -13bps and still at, or near, its all-time highs. As well, both LIBOR and Euribor have not moved meaningfully. In fact, the LIBOR 3-month spread is at 43bps and the Euribor 3-month spread is at 99bps, both of which remain at highs for the year. Finally, the Euro, which touched 1.355 intraday today, is now near its lows of the day as highlighted in the chart below.


Could Santa’s Sack Be Filled With Coal? - 4


A stealth takeaway in amid all the hysteria could be that the EUR/USD exchange rate is potentially allowed to trend lower at an accelerating rate. There has been speculation by many market participants that the rate has been artificially supported by the repatriation of European banks’ forced US dollar-denominated asset sales amid a drying up of USD-liquidity. Presuming that they can soon borrow US dollars at a very attractive rate from the ECB starting on December 5th, we would expect to see less repatriation on the margin from European banks. Ironically, the centrally-planned assault on investor hedges might actually be the catalyst for systemic correlation risk if the EUR/USD no longer has the support of cross-border repatriation.


From our vantage point, while this recent round of action does, on the margin, ward off imminent liquidity concerns for ailing European banks, it does nothing to address the solvency issues created by the marked-to-market value of their sovereign debt exposure – arguably the primary risk facing the global financial system today. Nor does it materially impact the looming specter of slowing global growth.


Moreover, presumably our central planners aren’t taking such drastic measures because they think “earnings are fine”. Perhaps their access to and analysis of exclusive interbanking data suggests to them that such aggressive measures are needed (yes, we think reducing the cost for insolvent European bankers to obtain access to our currency is an “aggressive” measure). They and the Chinese saw the need to attempt to ward off further deterioration in financial/capital market conditions in early September of 2008 and that was actually appropriate foresight.


Daryl G. Jones

Director of Research


Darius Dale


The UK’s Long Slog Ahead

Positions in Europe: Short France (EWQ)


UK Chancellor of the Exchequer George Osborne’s Autumn Statement speech yesterday, an update to a similar speech on the country’s economic outlook and budget last given in March of this year, laid out the impact of Austerity’s Bite via downside revisions to GDP, higher unemployment, and persistent inflation versus previous estimates. Importantly, Osborne announced that Britain will need two extra years of austerity beyond April 2015 to meet its deficit reduction plan.


For a people already reeling from austerity’s impact and GDP that is likely to slip into recessionary territory as soon as Q4, an extension of austerity signals government budget mismanagement, which prolongs an already weak consumer and business environment that feeds in to slower growth and reduced tax receipts, which, along with spending cuts, are essential to paying down the deficit.


Taken together, we think the BoE is likely to cut its main interest rate and expand its asset purchasing program over the medium term to aid weak to negative growth over the longer term.  We expect inflation to remain sticky, despite improving comps in 2012, and see weaker trade demand from its main trading partner (EU countries) as the region’s sovereign and banking crisis presses on. We’ll stick to making near-term trading calls on the Pound, as the EUR and USD crosses remain extremely volatile and influenced by headline risk. 


Key Points in the Autumn Statement include:


Economic Outlook

  • 2011 GDP will only grow 0.9% versus its last forecast of 1.7%, according to the independent Office for Budget Responsibility (OBR) that prepares forecasts for the Treasury
  •  2012 GDP was cut to 0.7% from 2.5%
  • Only in 2015 will growth return to a healthy 3%
  • OBR doesn’t see CPI reaching the target rate of 2% until the end of 2013
  • Net debt will peak at 78% of GDP in 2014-5, compared to 67.5% in 2011
  • Unemployment will rise to 8.7% in 2012 versus 8.1% in 2011
  • Europe’s sovereign debt and banking crisis should negatively impact trade.  Around half of UK Trade is with the EU, its largest trading partner, helping around 300K businesses and leading directly or indirectly to 3.5MM jobs.

Budget Changes

  • The State Pension age will rise to 67 versus 66 between April 2026 and 2028
  • State workers will see a pay raise of only 1% (versus 2%) when the current pay freeze expires at the end of 2013
  • 700,000 public sector workers (versus 400,000) will be cut over the next 6 years
  • Spending cuts of £8.3 Billion in 2015-6 and £15.1 Billion in 2016-7 will be carried out on top of the already £80 Billion planned over 5 years
  • A fuel duty increase of 3 pence/L will be delayed to August 2012 versus January 2012
  • £30 billion of new capital investment for investment in infrastructure (road and rail networks), superfast broadband, extra money for schools and housing, and increasing the regional growth will be allocated
  • Up to £21bn will be given to strengthen the flow of credit to smaller businesses that do not have ready access to capital markets
  • In total, the government needs to borrow an extra £112 billion by 2016

In the past we've traded the UK via the etf EWU in Hedgeye Virtual Portfolio.  


Matthew Hedrick

Senior Analyst


In general, the commodities that we monitor for the purpose of monitoring important trends for the restaurant and food industries posted mixed moves over the last week.  Chicken Wings were up again as coffee and dairy costs came down.






The outlook for beef in 2012 remains bullish from a price perspective and we continue to believe that restaurants with exposure to beef costs will see a dramatic increase in this item next year.  As we have been highlighting for some time, smaller cattle inventories and healthy demand from emerging markets are indicating that prices could continue to gain despite the strong trend in 2011.  It is important to note that while the export outlook is good, 80% of domestic beef production is reliant on consumption here in the U.S., according to cattlenetwork.com.   If unemployment gets worse, consumers could begin to substitute beef for chicken.  Today, at least, surging equity market seem to be reviving prospects for commodity demand but – while it is less clear what the markets will do in 2012 – the supply side picture is far more clear.



Chicken Wings – BWLD


Chicken wings continue to march higher.  Last week, we highlighted commentary from TSN that suggested that food service companies may focus more on chicken in 2012.  Given that processors such as SAFM are decreasing production, this could imply higher wing prices next year.  Our stance remains that 1Q12 will be difficult for BWLD as high wing prices pressure margins and the company does not have the option of preserving margins while driving sales through promotion, as it did in 3Q.  Higher wing prices do not necessarily correlate with EPS declines but, clearly, when prices are at extreme levels they become more relevant.  We expect wing prices to be up 55% or 60% year-over-year in the first quarter. 





Wheat and corn were up over the last week and continue to trade with a high inverse correlation to the US Dollar over the short-term.  92% of winter wheat in the 18 top producing states is emerged with 52% of the crop in good or excellent condition.  The quality of the winter wheat is ahead of the previous year.  Uncertainty around the debt crisis in Europe has been leading investors to exit grain markets, according to some commentators.  CFTC data showed that noncommercial traders increased their net short position in wheat to the widest level since early 2006 during the week ended November 22nd. 


Corn prices have traded lower on economic concerns over the last number of weeks but are trading higher today as equity markets gain following the action taken by the many of the world’s most important central bankers this morning.  Corn prices remain up year-over-year, but there are several data points that suggest that downward pressure could continue.  Brazil is set to releases some of its corn stocks next year to meet demand from meat producers that are currently combating higher prices.   Ukraine is also stepping up its exports at these elevated prices levels.  The country may ship a record amount of corn in November, according to some researchers.  The International Grains Council also said, during the week, that the world corn harvest in 2011-12 will be less than expected even a month ago on a reduced outlook for harvests in the U.S. and Mexico. 


All in all, declining wheat costs will be good for DPZ and PNRA while declining corn prices, if the trend continues, will be a positive for almost all industry players given how expensive the gain has become.
































Chicken – Whole Breast


WEEKLY COMMODITY CHARTBOOK - chicken whole breast



Chicken Wings
















Howard Penney

Managing Director


Rory Green


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%






Notes from CEO Keith McCullough


2 down days for the USD, 2 up days for Global Equities = Correlation Risk

  1. CHINA – not in headline news for the last few weeks but that doesn’t mean China’s growth slowdown (and implications to global growth) cease to exist; Chinese stocks got hammered overnight, closing down -3.3% close to their OCT lows (down -16.9% YTD). Thailand cut rates aggressively (125bps to 2.5%); expect more Asian rate cute (bullish for USD)
  2. EURO – just a pathetic week for European central planners and their currency’s credibility – rally to 1.34 is gone and now we’re testing intermediate-term lows of 1.32 again; bullish for the USD; bearish for Correlation Risk across Global Macro
  3. GOLD – down this morning because the US Dollar is up; this is a new correlation risk that’s developing and was only this high last in Q4 of 2008; immediate-term inverse correlation to USD now = -0.79 (vs TREND of +0.08). Liquidations and redemptions in the hedge fund business are significant and so is the gross and net long position in Gold. Selling what they can vs should.

Month-end is finally out of the way. Not a good month for most things other than the USD and Long-term Treasuries.











MCD: McDonald’s Corporation’s “Monopoly” promotion is the subject of a federal patent infringement suit launched by LaserLock Technologies.  LaserLock initiated the suit in 2010 against WS Packaging Group, one of the largest label converting operations in North America.


BAGL: Einstein Noah Restaurant Group announced the acquisition of Kettleman Bagel Company, a five-store bagel chain in Portland, Oregon.  The acquisition of Kettleman is part of the company's strategic growth plan aimed at strengthening its competitive position within the Pacific Northwest market. 





CAKE: The Cheesecake Factory was reiterated “Equal-weight” by Morgan Stanley following a meeting with management.


THE HBM: MCD, BAGL, CAKE - stocks 1130


Howard Penney

Managing Director


Rory Green



Short Selling Opportunity: SP500 Levels, Refreshed



Evidently I am really bad at getting the super-secret whisper on the next central plan to ban free-market pricing. That makes me wrong today. I sold my long position in Healthcare (XLV) this morning and will wait and watch to short SPY again.


If you look at either the YTD chart of the SP500 (attached) or the 3-day chart, you’re going to come to one conclusion – the US stock market continues to make a series of lower-long-term highs. 

  1. The long-term TAIL line of 1270 resistance is the big one that matters heading into DEC; today’s rally increases the probability of a down DEC
  2. The immediate-term TRADE line of 1238 makes most beta chasing securities immediate-term TRADE overbought today
  3. The intermediate-term TREND line of resistance I’d been using (1203) is now support 

Net, net, net – barring another central plan tomorrow morning (anything is possible) – this 3-day rally from 1158 to 1238 looks a lot like the one we saw on that “coordinated easing” of September 2008. Remember that?


I do. Short Covering was intense, but that only perpetuated the crash that ensued thereafter.


Big Government intervention A) shortens economic cycles and B) amplifies price volatility.




Keith R. McCullough
Chief Executive Officer


Short Selling Opportunity: SP500 Levels, Refreshed - SPX

The Lighthouse

This note was originally published November 30, 2011 at 07:49 in

“Cernowitz proved to be Schumpeter’s lighthouse.”

-Sylvia Nasar


In her outstanding chapter on Creative Destruction, Sylvia Nasar captures the most critical moment of a creative thought by comparing Joseph Schumpeter’s time at the University of Vienna to Albert Einstein’s at the Bern patent office (1902-1909).


“It gave one time to think one’s thoughts and, of course, to write them down. It also cut down on the distracting buzz of other people’s ideas.” (Grand Pursuit, page 187)


For the those of us who didn’t blow up other people’s money in 2008 (and again in 2011), we look and feel confident into year-end for good reason. Whether it’s me writing to you at the top of every risk management morning, or you delivering on Warren Buffett’s #1 Rule of Investing (“Don’t Lose Money”) for your families and clients – it’s all one and the same thing. Winning.


Together, we’ve travelled the often broken road of groupthink and we’ve seen the investment stars of bull markets rise and fall.


We are Wall Street 2.0. We are the change people can believe in.


Back to the Global Macro Grind


From what I can discern, there are two very different types of players on this globally interconnected market’s ice right now:

  1. Those who have stayed the course with the fundamental research call of 2011 – Global Growth Slowing
  2. Those who wake up every morning looking for a central planner to bail them out

Watching the US Equity futures trade this morning captures the essence of how short-term the group-thinking associated with the Type 2 Player in this game has become:

  1. At 4AM EST, I jot down in my trusty notebook “China down -3.3% to down -16.9% YTD, testing October lows”
  2. At 6AM EST, headline hits “China cuts reserve requirements, 50 basis points”

First, set aside the fact that few, if any, market sources even mentioned point #1 (no surprise there) and then realize that the S&P futures went from down 8 points to up 8 in a nanosecond of what could be best described as media panting about point #2 on Twitter.


Twitter, you see, is replacing what Old Wall Street calls “the tape.” On Wall Street 2.0, tweeters with analytical competence not only capture the China like headline “news” in real-time but have it synthesized within seconds.


Being fast isn’t being a “short-term” investor. It’s just called being smarter and faster.


Back to the China thread…


Sometimes getting your brain somewhere fast helps you recognize you need to slow down. Doing nothing in a market that’s trading on the “distracting buzz of other people’s ideas” of what the headline actually means is critical. The media’s immediate-term reaction to an alleged 1.3 TRILLION Eurocrat bazooka in late October is a good example of that (i.e. they don’t have one yet).


What does China’s decision to cut reserve requirements on banks mean?


It means China’s economic slowdown is accelerating on the downside, big time. The Chinese act, proactively, when they see a domestic demand problem.


What happens as the #1 unlevered growth engine of the world slows from double digit GDP growth to mid-single digits? You don’t even have to think too hard to figure that answer out. Global Growth Slowing matters to market multiples.



  1. The last time China started cutting reserve requirement rates was September 2008
  2. China continued to cut those rates until December of 2008
  3. US stocks didn’t stop going down until March of 2009

If you didn’t know that most US centric “stock pickers” are growth investors, now you know. As growth slows, stocks fall. Pull up charts of Apple, Amazon, or American Airlines (kidding – just needed another company starting with an A for literary purposes) and you’ll see, quite clearly, what the market is already discounting about Q4 versus Q3 Global Growth and demand.


If you flip a switch back to how that Type 2 Player continues to play the game – the Top 3 Begging For Bailouts headlines they are looking for are now as follows:

  1. European “shock & awe” money printing
  2. Fed getting sucked into to a QE3
  3. China rate cuts

From the vantage point of The Hedgeye Lighthouse this morning, all I have to say about all 3 of those options is that the Type 2 Players better be very mindful of what they wish for. Growth Slowing is a requirement for all three.


My immediate-term support and resistance ranges for Gold, Brent Oil, French stocks (CAC40), Amazon, Apple, and the SP500 are now $1661-1732, $108.53-110.59, 2923-3067, $177-209, $361-385, and 1147-1203, respectively. Lower-highs across the board.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Lighthouse - Chart of the Day


The Lighthouse - Virtual Portfolio

Early Look

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