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Today’s employment data was a positive for restaurants, in particular QSR.


With the exception of the 45-54 YOA cohort, which saw a sequential deterioration in employment trends in December, the age groups we monitor saw a sequential improvement in employment trends last month.  The chart below illustrates the national employment trends by age bracket.  For QSR, in particular, the sustained strength in employment trends among 20-24 year olds is encouraging for 4Q11 sales.  The restaurant industry is a prime beneficiary of improving employment trends as our macro team’s KING DOLLAR theme (strong dollar = strong consumption = strong America) continues to play out.





The restaurant industry is still hiring but there is a notable divergence forming between quick service and casual dining employment growth trends in November, as the chart below shows (this data set is released on a lag).  Casual dining employment growth seems to have stalled at just under 2% while QSR employment growth continues to accelerate. 





Howard Penney

Managing Director


Rory Green


The Topping Process: Short TIP Trade Update

Conclusion: Our soon-to-be released 1Q12 macro theme of Deflating the Inflation II portends negatively for the price of Treasury Inflation-Protected Securities.


Position: Short Treasury Inflation-Protected Securities (TIP). 


If there’s one thing Old Wall St. fails to understand it’s that being perma-anything in the Macro arena will get you carted out the back door over a long enough duration. Mean reversion and spread risk remain arguably the two most dominant drivers of price within, and across, asset classes.


Having authored the Inflation Accelerating call late in the summer of 2010 – a time when “deflation” and “double-dip” were the #1 and #2 topics de jour  on the Street – we are in a unique position that should help our clients prepare for what’s next.


Specifically, we understood that Burning the Buck to near-record lows would fuel a reflation rally in commodities that would eventually become corporate margin pressure that was ultimately passed through to end-consumers as higher price points/less discounting on a YoY basis.


Meanwhile, the consensus storytelling of “no wage growth = no inflation” has evolved into: “transitory supply-side shocks as a result of geo-political tension (crude oil) and ‘rapid’ emerging market demand”. Emerging market demand? The MSCI Emerging Market Index crashed -20.4% in 2011 as “rapid” emerging market demand slowed dramatically. The “BRIC” markets all finished down in a range of -18% to -25% as their demand for materials, like bricks, slowed alongside their domestic economic growth.


As Keith suggested on in the live Q&A segment of our daily Morning Macro call, “In Macro, your best short ideas are usually borne out of the realization of your best long ideas – of course after ceding the appropriate amount of time to the topping process.” Looking at TIPS/inflation hedges specifically, we think that topping process is beginning to draw to a close – appropriately well after we initially authored the bearish call on commodities in 2Q11.


Now we are in beginning to enter a sweet spot where our bottom-up view (our models point to lower-highs in CPI over the intermediate term) is supported by our top-down, quantitative view (King Dollar breakout; CRB Index breakdown). Together, those signals suggest that investors are likely to start to demand a lower premium for inflation protection over the intermediate term.


Where could we be wrong on the slope of U.S. CPI? While QE3 is always a possibility, we interpret the U.S. dollar’s quantitative setup (Bullish Formation) as: whatever the Fed does (if anything during this pivotal election year amid strengthening U.S. economic data) is likely to be trumped by the ECB, the BOE, the BOJ and other foreign central banks. That spread risk is bullish for the USD, as no currency is priced in a vacuum of itself.


The Topping Process: Short TIP Trade Update - 1


Additionally, the potential for geo-political risk to create another oil price shock is a factor we must consider. It is, however, rather difficult to interpret how much of that is already baked into the current prices of crude oil and TIPS. Moreover, just like with long-term TAIL growth and inflation forecasting, we have no edge on what is coming down the pike next from the unstable EMEA region. In either scenario, anyone who tells you otherwise is sacrificing analytical integrity for the sake of compensation.


For now, we are short TIP for a trade and will look manage the immediate-term risk.  A breakdown through the TREND line would give us further conviction in this thesis.


Darius Dale

Senior Analyst


The Topping Process: Short TIP Trade Update - 2

Weekly European Monitor: The EUR Drifts Lower Ahead of ECB Meeting

Positions in Europe: Short France (EWQ)


Asset Class Performance:

  • Equities: European indices were up with a negative divergence from the periphery week-over-week. Top performers: Finland 4.1%; Austria 5.0%; Russia (MICEX) 3.8%; Germany 2.7%; Sweden 2.5%. Bottom performers: Cyprus -10.4%; Hungary -5.1%; Spain -3.2%; Greece -3%; Italy -2.9%
  • FX: The EUR/USD fell -1.87% week-over-week. Divergences: RUB/EUR +2.36%; CZK/EUR -1.20%, Romanian LEU/EUR -0.66%
  • Fixed Income: 10YR sovereign yields broadly increased w/w, led by Spain +66bps to 5.69%; Belgium +51bps to 4.60%; and Greece +47bps to 35.43%. Italy’s 10YR is now up to 7.14%! 

Weekly European Monitor: The EUR Drifts Lower Ahead of ECB Meeting - 1. yields



Call Outs:

  • Overnight deposits at the ECB continue to make higher highs (€455.3 Billion).
  • Unicredit fell -38% this week, and its market cap has now dropped by €8 billion since the announcement of a €7.5 billion capital increase. 
  • Major bond auctions from Germany and France proved successful. Germany issued €4B of 10YR bonds at 1.93%, with strong demand, and France issued €8B of 10-30 year maturities with the 10YR average yield at 3.29% vs 3.18% on December 1. Yet, Italian 10YR yields closed Friday at 7.14%!
  • A downgrade of France’s AAA credit rating should be priced in at this point. That said, a downgrade will force Eurocrats to answer questions on the EFSF as a AAA rated facility, and push up yields on further EFSF issuance.
  • France re-engages in Financial Transaction Tax talks. Expected to make a decision by the end of January, France does not have the backing of the EU but some support from Germany and Italy, while Britain is vehemently against it. We think approval could be a huge headwind for France’s already ailing banking industry.


Charts of the Week: 

-Below we show the charts of Eurozone confidence and Manufacturing and Services PMIs for the month of December.  As forward looking indicators they present a mixed outlook for the region. Eurozone Confidence was largely flat to negative and the PMIs, despite a notable positive inflection month-over-month, have yet to confirm a trend.  We think the shortcomings of a “fiscal union” and the lack of an adequate bazooka to ring fence sovereign and banking issues should weigh on confidence to the downside in the coming months and mute any improvements we may see in the employment and inflation picture.


Weekly European Monitor: The EUR Drifts Lower Ahead of ECB Meeting - 2. confidence


Weekly European Monitor: The EUR Drifts Lower Ahead of ECB Meeting - 3. pmi


Weekly European Monitor: The EUR Drifts Lower Ahead of ECB Meeting - 4. pmi


Germany (EWG) - We’re getting more constructive on Germany on recent data, however are very aware that despite Germany’s strong fiscal position and employment base, the country’s capital markets are not immune to the region’s sovereign and banking contagion risk. After all, German equities were down last year -20% despite a similar strong fiscal and employment position. DAX is holding TRADE and TREND lines of support.



Key Regional Data This Week:

Positives (+)

Eurozone CPI 2.8% DEC Y/Y vs 2.9% NOV

Eurozone PPI 5.3% NOV Y/Y vs 5.5% OCT

Germany Retail Sales 0.8% NOV Y/Y (exp. 0.7%) vs -0.6% OCT

Eurozone Unemployment Rate 10.3% NOV (inline) vs 10.3% OCT


Negatives (-)

Germany Factory Orders -4.3% NOV Y/Y (exp. -1.2%) vs 5.2% OCT  [-4.8% NOV M/M (exp. -1.8%) vs 5.0% OCT]

Eurozone Retail Sales -2.5% NOV Y/Y (exp. -0.9%) vs -0.7% OCT  [-0.8% NOV M/M (exp. -0.4%) vs 0.1% OCT]


ECB Meeting Preview: On Hold

On Thursday January 12th the ECB convenes to announce its main interest rates. We expect the ECB to be on pause given the actions it took at the last meeting in December, namely the 25bps cut to the main interest rate to 1.00%, issuance of the 36 month LTRO, and reduction in the required reserve ratio from 2% to 1%.


We do expect macro fundamentals to deteriorate in 2012, which will warrant further cuts, however we expect the committee to give pause to review the impact of the measures taken in December. Headline inflation has moderated, which is favorable to the committee’s 2% target in 2012. We expect the ECB’s SMP facility to remain critical to fill sovereign demand and dampen yields and funding conditions to remain tight across banks.



Interest Rate Decisions:

(1/5) Romania Interest Rate CUT 25bps to 5.75%



CDS Risk Monitor:

-On a w/w basis, CDS was largely up across the Europe, with a positive divergence from the periphery.  Spain saw the largest gain at +55bps to 448bps, followed by Italy +26bps to 529bps, and Portugal +23bps to 1,113bps.


Weekly European Monitor: The EUR Drifts Lower Ahead of ECB Meeting - 5. CDS


Weekly European Monitor: The EUR Drifts Lower Ahead of ECB Meeting - 6. CDS




-We’d short the cross at $1.31 for an immediate term TRADE. The EUR/USD remains broken long term TAIL ($1.40) and intermediate term TREND ($1.42) in our models and we think the lack of resolve from the newest proposals for a fiscal union will encourage greater downside. 



The European Week Ahead:


Monday:  Franco-German Summit in Berlin.  Jan. Eurozone Sentix Investor Confidence; Nov. Germany Current Account, Trade Balance and Industrial Production; Dec. UK House Prices (Jan 9-13)


Tuesday:  Dec. UK BRC Shop Price Index; Dec. France Business Sentiment; Nov. France Manufacturing and Industrial Production; Q4 Russia Consumer Confidence (Jan 10-13)


Wednesday:  Hungarian President meets with the IMF in Washington to discuss loans. 2011 Germany Budget and GDP; Dec. Germany Consumer Price Index; Q3 Italy Deficit to GDP; Jan. Russia Weekly CPI; Nov. UK Trade Balance


Thursday:  Eurozone Announces Rates; Nov. Eurozone Industrial Production; Dec. Germany Consumer Price Index – Final; UK Announces Rates; Dec. UK NIESR GDP Estimate; Nov. UK Industrial and Manufacturing Production; Dec. France Consumer Price Index


Friday:  Nov. Eurozone Trade Balance; Dec. UK PPI Input and Output; Dec. Spain Consumer Price Index – Final; Jan. Russia Money Supply



Matthew Hedrick

Senior Analyst

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 80.51%
  • SHORT SIGNALS 78.32%


Join us in welcoming another winning New Year on January 12th from 6:00 to 9:00 PM. The celebration will take place at the Sake & Shochu Lounge at Zengo Restaurant, located on 622 Third Avenue at 40th Street, New York NY.


For furthers questions and RSVPs please contact us at .


Best Wishes,

The Hedgeye Macro Team








The Change in Nonfarm Payrolls came in at 200k versus 155k consensus with gains in retail, manufacturing, construction, transport and others.  The unemployment rate came in at 8.5% versus 8.7% consensus.  The labor force participation rate was unchanged at 64% in December. 




Comments from CEO Keith McCullough


Don’t be perma-bearish or bullish in 2012. Be right.

  1. JAPAN – down -1.2% last night puts Japanese Equities into the cellar of the major/liquid markets for the 1st week of the year. Away from being grounded by Keynesian policy, Japan has more issues than Time Magazine – so watch this market (because consensus isn’t). Japan needs to rollover 31.2% of its sov debt in 2012 – that’s 3 TRILLION Yens (a lot of yens = $566B USD)
  2. GERMANY – both bunds and stocks starting to act like the fiscal champ Germany has become; no matter what the fanfare and/or finger pointing is here in the US re the Europeans, Germany’s employment and fiscal position is better than USA’s and now the DAX is holding TRADE and TREND lines of support. Haven’t bought it yet, but I will.
  3. TREASURIES – let the masses focus on whatever it is they flip to day to day; today, I’ll be focused on 1 line in the sand and that’s the intermediate-term TREND line of 2.03% resistance on the 10yr UST; a sustained close > than 2.03%, combined w/ repeated closes > 1267 for the SP500 will have me doing more of what I have been doing for a month (buying stocks, selling bonds).


Sold my Growth Slowing position in Fixed Income yesterday (US Treasury Flattener – FLAT = +28% gain). I’d held that position for a year and felt all warm and fuzzy about the buy-and-hold on conviction thing. Onto the next.






THE HBM: EAT, RT, CBRL - subsector fbr





EAT: Brinker is one of JPM’s Thomas Lee’s Best Ideas for 2012.


RT: Ruby Tuesday reported 2QFY12 EPS last night after the close.  Comps came in at -4.2% at company-owned restaurants while EPS was -$0.02 versus consensus -$0.05.  The company is now moving to a sale leaseback strategy and plans to close 5-7 company restaurants and 15-17 franchise restaurants in FY12. For the year, the company now expects EPS of $0.55 to $0.65 versus consensus of $0.59 for FY12.  3QFY12 EPS is expected to come in at $0.12-$0.16 versus consensus of $0.25.


CBRL: Cracker Barrel was downgraded to Market Perform at Raymond James.


THE HBM: EAT, RT, CBRL - stocks



Howard Penney

Managing Director


Rory Green



Believe The Evidence

This note was originally published at 8am on January 03, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“A wise man proportions his beliefs to the evidence.”

-David Hume


If there’s one thing that Hume, Hayek, and Hedgeye may have had in common, it’s that free-market pricing bears evidence of the truth. That’s my 2012 Global Macro Strategy - Believe The Evidence.


For Global Macro investors managing risk across asset classes in 2011, evidently US Treasuries outperformed mostly everything else. With Global Growth Slowing and the 10-year UST Yield dropping -43% on the year (from 3.31% to 1.88%), America’s long-bond zoomed higher as the MSCI All-World Stock Index and the 19 component CRB Commodities Index dropped -7.2% and -8.1% respectively.


In the USA, primarily due to a +9.9% rally in the US Dollar Index (from testing a 30 year low post QE2), the last 8 months of 2011 were very different from the first 4 months of 2011. While US Dollar strength may have been what Keynesians fear-mongered as a “deflationary force” on certain stock and commodity market prices, it provided the tail-wind needed for the largest part of the US Economy – Consumption.


Believe The Evidence: C + I + G (EX – IM) = GDP. And 71% of the US GDP number comes from the C, Consumption.


From a Q1 of 2011 low of 0.36% US GDP growth (and an unemployment high of 9.2%), US GDP growth recovered to 2.0% by Q3 of 2011 (and unemployment fell to 8.6%). *Note to Bernanke: stay out of the way, it’s working.


Therefore, the most contrarian bullish call we can make on US GDP Growth in 2012 is that the US Dollar continues to strengthen. Not to be confused with what the US stock market or commodity markets do, employment and economic growth is what really matters. Any sniff of a QE3 implementation will drive inflation higher and stymie whatever real (adjusted for inflation) growth Americans can look forward to.


Back to the Global Macro Grind


With 13 consecutive booked gains in the Hedgeye Portfolio into the final day of the 2011, I’m feeling as good as I can feel about our risk management process. The goal in December was neither being bearish or bullish – it was simply to keep moving as prices did and to be right.


Rather than give you a reckless wire-to-wire “2012 Outlook” call this morning, I’ll give you our positioning (Hedgeye Asset Allocation Model):

  1. Cash = 61% (down from 70% before last week’s Global Equity and Commodity selloff)
  2. Fixed Income = 18% (Long-term Treasuries and a Treasury Flattener – TLT and FLAT)
  3. Int’l Currency = 12% (US Dollar – UUP)
  4. US Equities = 6% (Consumer Discretionary – XLY)
  5. Int’l Equities = 3% (China – CAF)
  6. Commodities = 0%

FYI: I haven’t worked alongside or know one top performing Portfolio Manager from the 2008-2011 period that deals with his or her Portfolio Strategy on a trivial duration of exactly 12 months starting January 1st.


Leading Portfolio Managers of the Wall Street 2.0 era have learned to be:

  1. Multi-duration
  2. Multi-factor

As the evidence changes, they do.


Absorbing all that’s new in my trusty notebook this morning, here’s how I think about the evidence in market pricing related to our aforementioned positioning:


1.   TLT and FLAT: Whether I look at the Bloomberg Consensus US GDP estimates or the 10-year trading at 1.94% this morning, it’s all signaling the same thing to me again this morning. Consensus has finally appropriately priced in the 2011 Growth Slowdown and now we can deal with Growth’s Pricing Signals day-to-day. A breakout > 2.03% on 10-year yields would have me sell TLT and FLAT.


2.   UUP: Strong Dollar = Strong Consumption = Stronger Employment. Rinse and Repeat. Whoever (Obama or his Republican challenger) figures this basic economic relationship out in 2012 is going to have a good shot at becoming the next President of the United States. US Dollar Index is in a Bullish Formation with its first line of immediate-term support = $79.37.


3.   XLY: There should be no confusion as to why I had a 0% asset allocation to US Equities in either July of 2008 or July of 2011. I fundamentally Believe The Evidence that debauching the dollar kills US Consumption (and confidence). Strengthen and stabilize the currency of a country and the volatility of its economic cycle (and how markets price it) will break down; equities then break-out.


4.   CAF: Pardon? Yep. TimeStamp us as being long Chinese Equities as of 3:19PM on December 29th, 2011. Call us the scions of “valuation” intellect buying a legitimately “cheap” Global Equity market or just call us names, we’ll either not sell this position for a few years or we’ll sell it tomorrow and smile either way. Strong Dollar = Deflating The Inflation (bullish for Chinese Consumption).


5.   COMMODITIES: Zero means zero. With the Gold price up for 11 consecutive years and Oil prices up for the last 3 in a row, I have zero problem calling a 0% asset allocation to this asset class as contrarian right here and now.


While Cyprus, Greece, and Egypt seeing their stock markets evaporate on the order of -72%, -52%, and -49%, respectively in 2011 has our eyes open to “value” opportunities outside of Chinese Equities, this morning there’s reason to believe that cheap can get cheaper. Poor Cyprus is down -4% to start 2012, and I’m going to Believe The Evidence rather than believing I’m smarter than Mr. Macro Market.


My immediate-term support and resistance ranges for Gold (covered our short position last week), Oil (Brent), and the SP500 are now $1580-1594, $107.86-110.26, and 1249-1270, respectively.


Best of luck out there this year,



Keith R. McCullough
Chief Executive Officer


Believe The Evidence - Chart of the Day


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