Time Stamps

Putin had Medvedev call off the war planes in Georgia this morning, Oil is down to $113, and Gold is hitting its 2008 lows. Doesn’t the world feel like a warm and fuzzy place again?

The only place I’d feel safe is hiding underwater with a bag of waterproof cash and Michael Phelps waiving off bull sharks overhead. While it is not clear whether or not Russia’s first military offensive since 1991 is actually over yet, it is crystal clear that Russia will do what they want, when they want. On this day in 1953, Russia detonated “Joe4” – their 1st thermonuclear bomb. While we don’t see that happening again anytime soon, no one else who bought the US market at yesterday’s highs does either – that’s why we call these scary ideas tail risks.

Phelps won his 3rd gold medal for the US last night, and this morning the US market is going to make its bid for its 3rd up day in a row. Yesterday, after lunch, my quant model registered a sell signal at the 1312 line in the S&P 500, so I sold my SPY position there. We have a “Hedgeye Portfolio” tab up on our site in beta test right now. The objective of the product will be twofold: Accountability and Timing. Two things that I think buy siders and individual investors alike want from Wall Street.

While being long the US market for a “Trade” for the first time in 2008 was a short stint, remaining short the Japanese “Trend” continues to be one that I have time stamped on the books. Despite the blow off in commodity inflation in July, Japan still posted an inflation number for July last night that registered as a 27 year high (+7.1% year over year). Inflation can be imported by a weakening currency as well as heightening local wage inflation – Asian economies are struggling with both of these factors all of a sudden. These factors will perpetuate economic stagflation in the immediate term.

The Nikkei closed down another -1% overnight at 13,303. On a breakdown and close through the 13,144 line, watch out below. Japanese stocks hardly look as ugly as those in China or Pakistan yet, and if you believe in mean reversion, that’s the point. There is much more downside in country indices that I am currently negative on like Japan and Mexico, than their respective regional counterparts like China and Brazil. China closed down another -0.52% overnight, taking its losses to -10% in the last 3 trading days, while Brazil got clocked for another -3.3% down move yesterday, taking the Bovespa’s cumulative losses since our “Fading Fast Money” call on 5/20 to -26%. Fertilizer or live chickens anyone?

Pakistan’s Karachi 100 Index has lost -34% of its value since the beginning of May. Alongside the geo-political tensions they are dealing with, wage inflation and currency devaluation are being revealed as primal fears. This morning Pakistan reported an inflation rate of +24.3% year over year. No, commodities deflation didn’t douse their domestic fires. It is “global this time” folks, indeed.

In the UK, consumer prices inflation surprised me to the upside, coming in at +4.4% year over year. Again, this is a July report and comes in well ahead of expectations, despite commodity deflation. The Euro’s -7% decline in less than a month is inflationary (for them). It is also recessionary. The only positive global inflation reading we have this morning was China’s, of all places – but their stock market didn’t care. Maybe that’s because they make some of their numbers up.

We can be bullish on the US market “Trade”. We can be bearish on the Japanese “Trend”. We can have positions in neither. We are data dependent, and looking forward to reflecting these views to our clients, real time, with time stamps. The US Dollar is finally overbought, as are US stocks at S&P . If these highly correlated macro “Trades” reverse, expect the bearish “Trend” to retake its grip on US investor psyche, expeditiously.

I am hiding under water, and I don’t feel warm and fuzzy about anything fundamental going on above (other than Michael Phelps), yet.



At least one major supplier to the Echelon project may have been shown the green light to ramp up production again. The go ahead was apparently given 1 week after stoppage was ordered. It is unclear from the supplier whether BYD is resuming the project or has decided on a more definitive time table for resumption of construction.

Management indicated that they are sticking to their conference call commentary and that my information is inaccurate. Their best guess is that construction will resume in 3 or 4 quarters but nothing is certain.

The Echelon project could go in many directions. A change in scope (downsized if anything), an agreement with a new JV partner, or just more conviction on a financing time table could all be drivers of an earlier restart.

Echelon is a major part of the Bull and Bear thesis on BYD so we’ll keep digging.

Research Edge will keep digging. BYD may or may not

QSR and the $5 price point!

A few weeks ago, I pointed out that Subway was having big success promoting the $5 price point. Looks like Arby’s is moving in the same direction, with its 5 for $5.95 promotion.

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For the casual dining operators, Applebee’s and Outback, they are using a $9.95 price point to drive traffic. I can understand the $9.95 price point for Applebee’s, but for Outback it appears like a desperate move.
  • The last I checked Outback’s average check was over $20. How is this good news for profitability?
Outback’s newest promotion
Applebee's newest promotion


The violence continues. Gaming stocks are moving at double digit rates, this time higher. The State of Nevada reported June Strip revenues down 3%, sparking a massive rally in casino stocks. Expectations were apparently much lower. I’d like to caution investors with the following points:

• Companies already reported Q2 EPS

• An accounting quirk shifted $11m of May’s slot revenue into June. The Strip would’ve declined by 5% excluding this shift.

• Strip gaming revenue for the major casinos (over $72m in annual revs) actually fell by 7%.

• Strip slot volume (coin in, drop, handle etc.) actually fell by 9%. Casinos either tightened their machines considerably (consumers will figure that out) or they played lucky

We view slot volume as the relevant metric to be gleaned out of the monthly reports. The trend there is not good as depicted in the chart; negative since October 2007. Slot revenue only ticked higher in June on the higher hold percentage.

If anything, trends are bad and likely worsening. You wouldn’t know it by the stock action.

Don't be fooled by June's slot revenue increase


We recently launched our "Hedgeye Portfolio" as a beta test. All of my security level decisions are time stamped there for accountability purposes.

We think this will solve for the #1 issue that the Street struggles with in paying for research - timing. I sold the trading position I have in the S&P 500 (SPY) at $131.32 today (that's and S&P 500 level of roughly 1312).

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