The Machinery

This note was originally published at 8am on December 20, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It is the machinery of banking which makes this imbalance possible.”

-John Maynard Keynes


While I am not sure what machinery Banker of America’s Brian Moynihan uses to make his economic and risk management forecasts, I am certain that he does not use the same machines we do. We use fractal math.


I’m also confident that The Machinery of a globally interconnected marketplace of colliding risk factors is completely misunderstood by the academic source code that drives these Investment Banking Inc. estimates – classical Keynesian economics.


The Machine” is actually what the best Global Macro Risk Manager of the 2007-2011 period (Ray Dalio, who I highlighted in yesterday’s Early Look when asking the question, What’s True?) calls economic “reality” – and sometimes it bites.


It certainly has in December.


At an “Economic Outlook” (scary) conference in Charlotte, NC yesterday, the embattled CEO of BAC channeled Hedgeye by suggesting “2012 will be another year that’s  a grind in the economy.”


Notwithstanding that Moynihan is 12 months late in recognizing economic reality and its impact on Bank Of America’s cash earnings (Net Interest Margins (NIM) collapsing), we still can’t figure out how he comes up with a +2.1% US GDP estimate for 2012.


Neither can his shareholders.


On December 31, 2010, BAC’s stock price was $13.34/share. Yesterday it closed at $4.99/share. While that sounds like a weekend special on a slab of flank steak, at down -63% for the YTD,  it’s even “cheaper” than that! A value meal at Mickey D’s is going to have a tough time competing with that price (even if you adjust for a black car service taking you through the drive thru, paying for gas).


As the venerable value investor Marty Whitman reminds us, “A bargain that remains a bargain, is no bargain.”


But what does this collapse of the US money-center banks mean? Isn’t this all Europe’s fault? Or this morning, should we just Blame Canada?


With the SP500 down -3.3% for December (after being down -0.6% in November and down -11.6% from the April 2011 high where the likes of Moynihan said US GDP Growth was going to be up +3-4%), how about we blame ourselves for once?


The Machinery of the globally interconnected marketplace has not changed. Unfortunately, neither has Old Wall St. It’s time we Embrace Uncertainty in our growth and inflation assumptions and stop begging for The Bernank to “smooth” the business cycle for us or our Too Big to Bail banks are going to be sitting right back where they were 23% higher in the S&P (October 2007).


In the meantime, here’s what going on in this morning’s USA Macro Grind:

  1. SP500 is testing its only remaining line of support in our TRADE/TREND/TAIL model (TREND = 1207)
  2. US Equity Volatility continues to hold its long-term bullish TAIL line of 23.11 support
  3. The Range (of risk) in my immediate-term probability model for the SP500 is 72 points wide (manageable)
  4. US Stock Market Volumes are as dead as the trust Americans have in Big Government Intervention markets
  5. Sector Risk: Financials (XLF) led decliners yesterday and remain in a Bearish Formation (crashing -23.2% YTD)
  6. Sector Signals: Consumer Discretionary (XLY) and Consumer Staples (XLP) hold up relatively well with Strong Dollar
  7. Strong Dollar = Strong US Consumption (try it at the pump this weekend, you’ll like it)
  8. US Dollar Index is busting a move into a Bullish Formation with immediate-term upside to 81.24
  9. US Treasury Yields continue to signal that Growth Slowing will be here through Q112 (10yr = 1.85% this morning)
  10. Yield Spread (proxy for growth and US bank earnings) = +161 basis points wide, and compressing

Outside of the USA, the Top 3 Risk Management items to recognize as reality today are:

  1. Eurocrat Bazooka is more like a pepper-gun
  2. China says they are not going to implement a “large stimulus”
  3. Greece is going away

Don’t worry SocGen vacationers, I don’t mean the Greek islands and beaches – I just mean their stock and bond markets. Greece issued 3-month piggy paper at 4.68% this morning and her stock market hit a fresh YTD low at 644 on the Athex Index (down -62.4% from Q111).


I suppose that if we give Keynes a bailout do-over on the quote about The Machinery of banking, he’d have to call the money printing and piling-debt-upon-debt solution to Greece one heck of an “imbalance!”


God Bless America and the opportunity we have here to stop what we are doing. It’s time to Re-think. Re-work. Re-build.


My immediate-term support and resistance ranges for Gold, Oil (Brent), German DAX, French CAC, and the SP500 are now $1568-1614, $101.34-106.28, 5573-5807, 2905-3043, and 1193-1213, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Machinery - Chart of the Day


The Machinery - Virtual Portfolio


The Macau Metro Monitor, December 23, 2011




SJM has announced a 5-10% pay raise for next year.  The percentage of the increase is based on salaries, with employees with lower salaries getting higher raises.  All SJM workers are entitled to the salary increase.  “With the implementation of the salary increase, bonus payout, welfare optimization and new rewarding system, we express our gratitude towards our employees and enhance the team spirit and loyalty,” said Louis Ng, SJM’s director and COO.



Macau visitor arrivals totaled 2,417,765 in November 2011, rising 20.1% YoY․  Visitors from Mainland China surged by 33.2% YoY to 1,460,992 in November 2011, with the majority coming from Guangdong Province, Fujian Province and Zhejiang Province.  Mainland visitors traveling to Macau under the Individual Visit Scheme totaled 561,070, up by 28.3%.





Singapore CPI rose 5.7% YoY in November - higher than Street estimates of 5.4%.  Excluding accommodation costs, inflation was 4.4% higher YoY.




TODAY’S S&P 500 SET-UP – December 23, 2011


On very lower volume Santa found his way back to getting the SP500 up to +0.6% for December;  US Stocks flat for November/December.  As we look at today’s set up for the S&P 500, the range is 31 points or -2.07% downside to 1228 and 0.40% upside to 1259. 











  • ADVANCE/DECLINE LINE:  1540 (+845) 
  • VOLUME: NYSE 774.60 (-6.03%)
  • VIX:  21.16 -1.26% YTD PERFORMANCE: +19.21%
  • SPX PUT/CALL RATIO: 3.06 from2.53 (+21.06%)




  • TED SPREAD: 56.87
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 1.97 from 1.98   
  • YIELD CURVE: 1.69 from 1.70


GLOBAL MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am, Durable Goods, Nov., est. 2.2% (prior -0.5% (revised))
  • 8:30am, Personal Income, Nov., est. 0.2% (prior 0.4%)
  • 8:30am, Personal Spending, Nov., est. 0.3% (prior 0.1%)
  • 10:00am, New Home Sales, Nov., est. 315k, up 2.4%, from 307k
  • France Q3 GDP +0.3% q/q vs prior +0.4%
  • France Nov producer prices +0.4% m/m vs consensus +0.1%, prior +0.5%
  • UK Nov mortgage approvals for home purchase 34,738 up +16% y/y and vs 35,196 in Oct


  • House Speaker John Boehner agreed to 2-month extension of payroll tax cut
  • NY Post names assets rumored to be in deal for Yahoo!'s Asian holdings
  • Regulators to extend deadline for comments on Volcker rule - Bloomberg
  • Unified financial market regulation in Canada may be years away - Globe and Mail
  • Motor Thailand expects normal operations to resume in mid-January - The Nation




COMMODITIES – both the CRB Index and all of its key components w/ highly inverse correlations to the USD have rallied right back up to where they should be shorted. Short Gold, Oil, Coal – take your pick. I think the Correlation Crash in commodities comes back in a hurry next week.


  • Yanzhou Coal Agrees to Buy Gloucester in A$2.1 Billion Deal
  • Fair Trade Proving Anything But to Farmers in $6 Billion Market
  • Copper Traders Most Bullish Since October on Demand: Commodities
  • Sundance Seen Doubling Money on Takeover Betting Today: Real M&A
  • China, India Rate Cuts Seen Faster Than Korea: Chart of the Day
  • India Group Seeks $7.8 Billion State Funding for Afghan Mine
  • Putin’s Oil Wins Record Premium at Europe’s Cost: Energy Markets
  • Oil Heads for Biggest Weekly Gain in Two Months on U.S. Economy
  • Mongolia Spending Glut Risks Bust on Commodity Outlook, IMF Says
  • Stocks in U.S., Europe Gain as 10-Year Treasuries, Oil Advance
  • Gold Advances as Signs of U.S. Recovery Reduce Dollar Demand
  • Barclays Metal Losses May Be Accounted For, Mediobanca Says
  • China May Buy Corn If Price Falls to $5 a Bushel, Yigu Says
  • Oil May Rise on Middle East Geopolitical Tension, Survey Shows
  • Copper Rallies for Fourth Day on Stockpiles, U.S. Jobless Data
  • Soybeans, Corn Drop as Rains May Ease South America’s Dry Spell
  • Palm Oil Set for Biggest Weekly Advance in One Year on Weather
  • Gold Drops as Jobless Claims Slow, Investors Reduce ETF Holdings
  • Yanzhou to Buy Gloucester Coal for A$700 Million, Stake in Unit
  • Gold Rebounds in London as Dollar’s Decline May Support Demand





EURO – flat on the week at 1.30 is just not good considering half a TRILLION of leverage lathered onto insolvent banks. King Dollar’s reign is fortified as the US Dollar Index holds all 3 consequential levels of support (TRADE, TREND, TAIL lines in our model), w/ the most immediate-term line of support = $79.54.












INDIA – coal in the stocking for most Asian Equity investors this week but a better than bad session overnight (it was the 1st day of the wk that China didn’t go down) with India’s Sensex flashing the negative regional divergence, closing down another -0.52% to -23.2% YTD. Fitch cuts their Asian GDP forecast – thanks for coming out, only about 6 months late. That said, Asian Growth Slowing remains reality.







  • Israel Didn’t Know High-Tech Gear Was Sent to Iran Via Denmark
  • Putin’s Oil Wins Record Premium at Europe’s Cost: Energy Markets
  • Malaysia Sukuk Rally on Jump in Banking Assets: Islamic Finance
  • Baghdad Bombings Kill at Least 57 Amid Shiite-Sunni Tensions
  • Ex-Marine’s Afghan Tour Included Rescuing Dogs Forced to Fight
  • Quiet Iraq Exit Won’t Have a Replay in Afghanistan: Noah Feldman
  • Iraq Oil Output Has Reached a 20-Year High, Shahristani Says
  • Oil to Set Record in 2012 as U.S. Dodges Slump: Energy Markets
  • Iran-Ban Threat Pushes Tanker Hiring to Record: Chart of the Day
  • Coromandel International Gains in Mumbai After Qatar Deal
  • Haaretz: Report: Israeli company sold surveillance equipment to Iran
  • EU Banks’ Retreat Creates Gap for Gulf Borrowers: Arab Credit
  • Dana Gas Slumps to Lowest on Record on Egypt Delay Report
  • Exxon Spars With Iraq Over Lack of Payment



The Hedgeye Macro Team

Howard Penney

Managing Director

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NKE: Buying


Keith just added NKE to the Hedgeye virtual portfolio on red. Both top-line and futures came in better than expected and inventories improved on the margin this quarter driving our incremental bullishness on the immediate-term TRADE and intermediate-term TREND in light of our already bullish long-term TAIL call.

The bottom-line is that sales momentum is strong, margins are on the mend, inventory is coming down, the event schedule looks great, capital intensity is moderating, and Nike is showing greater focus in returning capital to shareholders.

The biggest risk here is the ‘can things really get any better’ factor, but the reality is that we don’t have to worry about that for another year – at least.

Consider the following regarding the current TRADE and TREND setup:

  1. futures growth of 13% is more heavily weighted towards the back-end of the 5-month window,
  2. this only partially reflects pricing increases that are in the midst of going into effect. In other words, futures will accelerate simply bc of pricing in 2H (this is one of the very few times in the better part of 15 years that I can recall the company having the confidence to actually guide futures), and
  3. the company is looking at an outstanding event year, with assumption of the NFL license in April, European Football Championship (Euro 2012) , and the Olympics from July 25 to Aug 12.
  4. rest assured, as we do, that these events will simply not come and go, leaving Nike with a tough revenue hurdle in 2013. The company will use each of them to build sustainable businesses to take share long after the games are
    complete. In fact, Charlie Denson noted several times that there are a few ‘surprises’ coming down the pike later this year. This is the same kind of posturing we saw around major launches like Air 180, Free, Lunar and Nike +. Again, these are platforms, not just products.

We remain 15-20% above consensus for the next three years. For additional detail, see our post Q2 note “NKE: Too Good.”


NKE: Buying - NKE TTT


NKE: Buying - Olympics chart




Buffalo Wild Wings was shorted moments ago in the Hedgeye Virtual Portfolio.  From a fundamental perspective, this is one of our favorite names on the short side.


Buffalo Wild Wings’ share price has popped up 14% over the last week after trading below $60.  A sell-side upgrade generated some attention for the stock last week and since then BWLD has strongly outperformed the market.  The stock is currently being awarded an EV/EBITDA NTM multiple of 8.3x by the Street.  Only BJRI and DIN trade with higher multiples in the casual dining space.  The Hedgeye Macro Team’s current theme, “King Dollar”, has played out nicely and a corollary of that has been a strengthening of U.S. consumption.  While our longs have worked nicely under this macro theme, BWLD has worked less effectively over the past week than it had been.  From a quantitative and fundamental perspective, however, we are still bearish on the stock – at these prices, only more so.


We have discussed our short thesis at length: wing prices are heading higher in a hurry and this will greatly dilute the effectiveness of any promotional approach the company might take to driving comps, a strategy that worked well in 3Q.  Margins are likely to take a leg down and, while King Dollar is likely helpful for comps, we are pessimistic about the prospects of the company taking further price in the hyper-competitive discounting environment that exists in casual dining today.  At the same time, dropping price in 4Q and (especially) 1Q12 is a completely different proposition than doing so in 3Q11 when wing prices were down year-over-year.  1Q12 is the litmus test of this fundamental thesis; we expect wing prices to be up 50-60% year-over-year. 


This company has growth and that is part of the reason why it is being awarded a (relatively) rich multiple but we believe it is worth noting the G&A associated with that growth since much of it is focused in new markets.  On the 2Q11 earnings call, management had this to say:


“We underestimated in two areas for the second quarter: the one is the amount of money that we were putting into recruiting training managers, staffing, regional managers in these new markets on both coasts, where we don't have an infrastructure to do any of the training locally. So, a lot of travel expenses related to that that we – I just could not have fully captured in my estimate for the second quarter.”


From a quantitative perspective, the TRADE line of resistance is at $69.19, as illustrated by the chart below.


BWLD: TRADE UPDATE - bwld levels



Howard Penney

Managing Director


Rory Green



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