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Changing Direction

This note was originally published at 8am on January 26, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“There is nothing wrong with change, if it is in the right direction.”

-Winston Churchill


When they were both green yesterday, I sold my entire US Dollar (UUP) and US Equity positions (XLY and XLU) in both the Hedgeye Portfolio and the Hedgeye Asset Allocation Model. That takes me to 91% Cash.


What changed?

  1. Growth Expectations
  2. Inflation Expectations
  3. Fiscal and Monetary Policy

Very rarely do all 3 core fundamental research factors (Growth, Inflation, and Policy) change in a 24 hour period. Very rarely has the United States of America had both its President and Federal Reserve Chief delivering US Dollar Debauchery messages on back to back days.


Rather than listen to some Keynesian Quack tell you how yesterday’s Fed message isn’t inflationary or have another Washington “forecaster” tell you that inflation doesn’t slow growth, listen to what the market is telling you this morning:

  1. Growth Expectations are falling (10-year US Treasury Yield snaps my 2.03% TREND support; Yield Spread compresses 6bps day/day)
  2. Inflation Expectations are rising (Gold, Copper, TIPs, etc. all went vertical post The Bernank’s 1230PM 1/25/12 USD Debauchery)
  3. The Growth Slowing TRADE (US Treasury Flattener, FLAT) is ripping – that’s what pancaking free market pricing of bond yields does

Now Masters of The Obvious will be quick to point out, as they tend to during any short-term hyper-inflationary move for stocks and commodities (German stocks looked awesome during the hyper-inflation of the 1920s) that this is good. No doubt it’s good for those who are long of the inflation policy – but really bad for the other 99% who get the inflation bill at the pump or in their food.


I’m not going to re-hash everything about my Globally Interconnected Economic Risk Management Model that got us to make the Growth Slowing call at this time of 2011. The model hasn’t changed. Big Government Interventions in markets have. *Reminder: they A) Shorten Economic Cycles and B) Amplify Market Volatilities.


Oh, and by the way – it’s not just a non-bank bailout Independent Research firm in New Haven, CT that gets it at this point:

  1. Jaime Dimon is explicitly calling out Bernanke for lowering long-term yields and compressing the Yield Curve
  2. Mitt Romney told Larry Kudlow last night that he’ll fire Bernanke and bring in his “own guy”
  3. The American Institute of Economic Research (www.aier.org) has already quantified what 0% means to the 99%

Just to recap the headline calculations out of the AIER that were released after Qe2 failed (July of 2011) in a paper titled “The Steep Cost of Cheap Money”:

  1. Zero Percent rate of return on American Savings accounts is huge income tax (it’s called interest income, confiscated)
  2. GDP lost (due to the interest income you could have spent) = upwards of $587B in US Consumption
  3. US Jobs lost (due to lost Consumption) = 2.4-4.6 million and “shaved between 1.75-3.32% to gross-domestic-product growth”

Oh, and by the way Part II – unlike the Fed who is completely politicized and dogmatized at this point, the American Institute of Economic Research is independent (neither politically or academically partisan).


Whenever the names of politicians are included in economic analysis, partisan people get emotional paralysis. Bush’s fiscal and monetary policies were as bad as Obama’s inasmuch as Jimmy Carter’s were as bad Nixon’s.


Nixon had no problems lying to the American People, but he actually told the truth on this score when he admitted “we are all Keynesians now.” Neither Bush nor Obama have been brave enough (or advised by someone analytically competent enough) about globally interconnected markets to say the same about the 1 thing they had in common – Bernanke.


To recap how the Global Macro market actually work:

  1. GROWTH: US and Emerging Market Growth is highly dependent on 71% of the US GDP number (Consumption Growth)
  2. INFLATION: Policies to Inflate (devalue the world’s Reserve Currency) slow real (inflation adjusted) growth
  3. SLOPES: since Qe2, the sequential rate of change in Growth has been highly affected by the rate of change in inflation (prices)

Bernanke and his boys will tell you inflation is “low” when it’s up and down. How else could a man tell you with a straight face that during all-time highs in the price of Oil, Food, and Gold that there is no inflation?


Since 2006, this guy hasn’t tightened monetary policy once. Whether his Qe2 Policy To Inflate slowed US GDP Growth to 0.36% in Q1 of 2011 or if it’s +733% higher at 3% GDP Growth today, he will not change as the data does. This is an embarrassment to the American flag. In order for Bernanke to have every last lemming who remains willfully blind enough to the math to believe him, he needs to fear-monger.


Fear-Mongering just when Strong Dollar = Stronger Employment = Stronger Confidence… just when things were getting better by simply having him out of the way – he’s back.


He’s telling American savers to go lever themselves up with stocks after a +96.2% run off the March 2009 lows. He’s telling Obama to give a “Mega Refi” to every one of your neighbors who levered themselves up and crushed the value of your home. He’s telling you to take 0% rate or return on your hard earned savings until 2014 and like it.


I’m telling you I’m Changing Direction. This country’s said political and academic leadership should too.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, and the SP500 are now $1676 (big TREND breakout level)-1721, $110.11-111.98, $1.29-1.31, and 1308-1331.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Changing Direction - Chart of the Day


Changing Direction - Virtual Portfolio


TODAY’S S&P 500 SET-UP – January 31, 2012


As we look at today’s set up for the S&P 500, the range is 18 points or -0.53% downside to 1306 and 0.84% upside to 1324. 












  • ADVANCE/DECLINE LINE: -797 (-1654) 
  • VOLUME: NYSE 743.68 (-12.53%)
  • VIX:  19.40 4.70% YTD PERFORMANCE: -17.09%
  • SPX PUT/CALL RATIO: 1.97 from 1.94 (1.55%)


  • TED SPREAD: 50.10
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 1.87 from 1.84
  • YIELD CURVE: 1.65 from 1.63

MACRO DATA POINTS (Bloomberg Estimates):


MONTH-END – you know it, we know it – it is what it is. Today is the day where anyone can suspend disbelief that the best JAN for stocks since 1997 is going to straight line as what happens for the rest of the year. From an immediate-term TRADE overbought perspective, this looks a lot like FEB 2011 – lower long-term highs right as Growth Expectations start slowing.

  • 7:45/8:55am: Weekly retail sales
  • 8:30am: Employment Cost Index, 4Q, est. 0.4% (prior 0.3%)
  • 9:45am: Chicago Purchasing, Jan., est. 63.0 (prior 62.2)
  • 10am: Revisions: ISM’s 2012 Seasonal Adjustments
  • 10am: Consumer Confidence, Jan., est. 68.0 (prior 64.5)
  • 10am: NAPM-Milwaukee, Jan., est. 57.5 (prior 57.8)
  • 11:30am: U.S. to sell $33b 4-week bills


    • Republican presidential primary in Florida
    • BGOV survey showing how much it may cost U.S. companies to strengthen their computer network defenses against cyber attacks, 8am
    • U.S. presidential candidates release financial reports showing donors, funding levels, how much candidates are contributing to their campaign
    • Congressional Budget Office to release report on “The Budget and Economic Outlook,” 11am
    • Senate in session:
      • Senate Energy Committee holds hearing on the global energy outlook for 2012, 10am
      • Senate Finance Committee holds hearing on tax extenders, 10am
      • Senate Banking Committee hears from Consumer Financial Protection Bureau Director Richard Cordray, 10am
    • FAA conference committee meets, 4pm


  • European governments moved toward a confrontation over a second rescue package for Greece even as leaders signed off on key planks of strategy to end financial crisis
  • Mitt Romney leading in polls in Florida; Newt Gingrich says he will continue race after today’s primary
  • BlackRock forecast the Fed will refrain from third round of debt purchases as economy grows
  • S&P/Case-Shiller index of property values in 20 cities may have gained 3.3% Y/y, economists est.
  • CFTC is weighing new rules and oversight of companies that use automated and high-frequency trading systems
  • Apple named Dixons CEO John Browett to lead retail business
  • Facebook IPO watch


    • CIT Group (CIT) 6am, $0.01
    • Danaher (DHR) 6am, $0.78
    • Mattel (MAT) 6am, $1.00
    • Tyco International (TYC) 6am, $0.79
    • Helmerich & Payne (HP) 6:30am, $1.16
    • L-3 (LLL) 6:30am, $2.41
    • Eli Lilly (LLY) 6:30am, $0.81
    • Archer-Daniels-Midland Co (ADM) 7am, $0.76
    • Celanese (CE) 7am, $0.56
    • Entergy (ETR) 7am, $0.89
    • Lexmark International (LXK) 7am, $1.16
    • Metro (MRU/A CN) 7am, $0.96
    • Pfizer (PFE) 7am, $0.47
    • Pentair (PNR) 7am, $0.54
    • Tellabs (TLAB) 7am, $(0.01)
    • Oshkosh (OSK) 7am, $0.34
    • United States Steel (X) 7:05am, $(0.86)
    • McGraw-Hill Cos /The (MHP) 7:10am, $0.57
    • Biogen Idec (BIIB) 7:15am, $1.49
    • Inergy (NRGY) 7:45am, $0.23
    • United Parcel Service (UPS) 7:45am, $1.26
    • Valero Energy (VLO) 7:45am, $(0.19)
    • Illinois Tool Works (ITW) 8am, $0.88
    • Paccar (PCAR) 8am, $0.79
    • Exxon Mobil (XOM) 8:03am, $1.98
    • Avery Dennison (AVY) 8:30am, $0.46
    • Potlatch (PCH) 8:30am, $0.13
    • Imperial Oil Ltd (IMO CN) 9am, $0.92
    • JDA Software Group (JDAS) 4pm, $0.63
    • Plantronics (PLT) 4pm, $0.68
    • WR Berkley (WRB) 4pm, $0.47
    • Illumina (ILMN) 4:01pm, $0.34
    • Seagate Technology (STX) 4:01pm, $1.09
    • Amazon.com (AMZN) 4:05pm, $0.17
    • Broadcom (BRCM) 4:05pm, $0.65
    • Ace Ltd. (ACE) 4:05pm, $1.77
    • Aflac (AFL) 4:06pm, $1.51
    • Arthur J Gallagher & Co (AJG) 4:11pm, $0.33
    • CH Robinson Worldwide (CHRW) 4:15pm, $0.68
    • Boston Properties (BXP) 5:15pm, $1.19
    • Suncor Energy (SU CN) 10pm, C$0.89



COMMODITIES – anyone long inflation has to be right fired up again this morning (We are – bought Energy yesterday); the Bernank Tax is obviously very bad for the country/economy, but great for commodity longs – Gold and Copper have gone vertical since the FOMC statement, up +11.4% and +12.5% for JAN respectively!

  • Silver Powering 20 Million Homes as Glut Subsides: Commodities
  • Gold Climbs to Seven-Week High in Best Start to Year Since 1980
  • Wheat Rises as Cold Weather in Europe May Harm Winter Crops
  • Oil Heads for Monthly Gain on Europe Optimism, Iran Tension
  • Copper Rises, Heads for Best Start to a Year Since at Least 1987
  • Cocoa Rebounds as Dry Weather May Hurt Crops, Sugar Advances
  • Iron Ore Set for Worst Month Since October on Slowdown Concerns
  • Outokumpu Agrees to Buy ThyssenKrupp’s Stainless Steel Unit
  • Myanmar Rice Shipments May Double This Year, Group Predicts
  • Korea Gas to Buy U.S. LNG as Gas Slump Attracts Asian Importers
  • Cocoa May Climb to 1,668 Pounds on Fibonacci: Technical Analysis
  • Oil Supplies Rise in Survey as Fuel Output Falls: Energy Markets
  • ADM Second-Quarter Profit Misses Estimates After Corn Costs Rise
  • COMMODITIES DAYBOOK: Oil Gains as Japan Industrial Output Rises
  • Coal-Carrier Rates Seen at Decade-Low as Glut Expands: Freight









GERMANY - Contrast of The Day: Italy's unemployment rate hits an 8 year high of 8.9% as Germany's hits 20 year low of 6.7% - the Germans are absolutely killing it right now – gaining big political power, seeing a +10.2% YTD stock market move, and unemployment fall #winning.












The Hedgeye Macro Team






Will a Falling US Dollar End the Market Rally?

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Not Now

“How soon ‘not now’ becomes never.”

-Martin Luther


Don’t worry, I’m not going to go off on the Protestant Reformation of 16thcentury Europe this morning. I’m going to give some much simpler advice re: chasing any asset price higher today – Not Now. Most things will get marked-up into month-end.


That’s not to say I didn’t think yesterday at 9:51 AM wasn’t a good time to buy. With the SP500 testing 1301 (down 32 points, or -2.4% from last Thursday morning’s 1333 high), that’s where I bought Energy (XLE), taking my Cash position down from 91% to 85% and taking up my US Equity position in the Hedgeye Asset Allocation Model from 0% to 6%.


Some people get all fired-up about this whole TimeStamping thing we do. It’s really nothing to get emotional about. It’s just what we do. We like to make calls and be held accountable to the timing of those calls. We call it the score.


Back to the Global Macro Grind


These German dudes and dudettes have to be right fired-up this morning. In the face of the entire world begging them to bail out the dysfunctional; and after watching the American media chastise them for not being able to do the “right thing” – they just kept saying Not Now to just about everyone who no longer needs Luther’s Latin translation for the word never.


How is the economic model of German fiscal conservatism scoring? Here it is, head-to-head, versus Italy:

  1. Germany Unemployment = 6.7% JAN vs 6.8% DEC = 20-year low
  2. Italy Unemployment = 8.9% JAN vs 8.8% DEC = 8-year high

What’s in your wallet?


Again and again and again, we’ve tried to remind our audience that the strength of a country is not explicitly reflected by the daily moves of her stock market. Ask the Germans who lived through a 1920s stock market hyper-inflation about that.


If you don’t have a policy to fear-monger your citizenry into believing that saving is evil, you might just build a national confidence and pride that reflexively equates to more stable employment and consumption.


In the US, we’re getting closer to figuring this out. Or are we? Romney’s monetarily conservative message seems to be picking up some momentum in Florida and, at the same time, it still looks like President Obama can change fiscally.


Yes We Can. But will he?


Instead of being politically polarized by the debate, I think the world’s vote on this will continue to be on the tape each and every day, ticking, via the sequential momentum in the US Dollar Index.


If you haven’t noticed, in the last few weeks, the US Dollar has lost a statistically significant amount of momentum:

  1. US Dollar Index = down -3.1% since its intermediate-term top of $81.53 in mid-January 2012
  2. US Dollar Index = up +8.2% since testing a 40-year low during the thralls of Qe2’s policy to inflate (April 2011)

To be crystal clear on this, the correlation to asset prices between the US Dollar Index and everything else in Global Macro right now is unclear.


In sharp contrast to April 2011, when the inverse correlation between US stocks and the USD was tracking in the -0.8-0.9 range, today’s 120-day correlation is actually a positive +0.44 and US Equity Volatility (VIX) has an inverse correlation to USD of -0.59.


In other words, before The Bernank Tax last week, the Fed was out of the way and we saw a stabilization/strengthening of the US Dollar over the course of the last 3-6 months that:


      A) firmed up US Confidence, Employment, and Consumption (71% of GDP)

      B) started to tone down one of the biggest risks to returns in any business – expected price volatility


American Progress by simply having Bernanke and Geithner out of the way – fancy that. Americans were/are getting it done without the heavy hand of government help. No matter what your politics, that’s just good.


What would not be good for the US economy or stock market (again, two very different things) would be a breakdown in the US Dollar Index of $78.03 intermediate-term TREND support and a breakout in US Equity Volatility (VIX) above TRADE line resistance of 20.86. That would really fire up the price of oil. Copper is already up +12.5% YTD!


Not Good. Not Now.


As you can see in the long-term chart of US Stocks (SPX) vs Equity Volatility (VIX):

  1. The SP500 is making a series of lower long-term highs
  2. The VIX is making a series of higher long-term lows

The charts look Japanese because the long-term Bush/Obama Keynesian Policies have been. That chart also summarizes the societal American Zeitgeist about markets and the central planners infecting them.


Is President Obama prepared to tell Ben Bernanke to get out of the way and let American Savers earn a rate of return on their fixed incomes? Not Now. While hope is not a risk management process, I can only pray that doesn’t mean never.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, German DAX, and the SP500 are now $1, $110.61-111.89, $1.30-1.32, $78.70-79.75, 6, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Not Now - Chart of the Day


Not Now - Virtual Portfolio


Wendy’s’ stock has flat-lined for over three years and, after today’s presentation, we have become less positive on the next three years.  Its going to be an uphill battle for WEN to hit its long-term target of high-single- or double-digit EBITDA growth over that period.


TRADE:  While the new burgers continue to help lift same-store sales trends, the combination of beef inflation and lower long-term guidance limits the current upside.


TREND:  We are cautious on this duration as rival brands continue to execute on their own remodel strategy.  CEO Emil Brolick has admitted that, while menu innovation is important, the full benefit won’t come through until the asset base is upgraded.


TAIL:  More than $3.7 billion is required to the Wendy's asset base, according to management.  That's the figure needed to carry out an "Image Activation" at the 70% of the Wendy's system that is earmarked for extensive remodeling.  The company's market cap is $1.99 billion.  Its 2011 revenue came in at $2.43 billion. We do not have a view on the TAIL because there is a lot of uncertainty as to how the remodels will test.  The math does not inspire much confidence.


The first question anyone need to ask is where is that money going to come from and when will the capital start to flow? 


Coming into today’s presentation, we were of the opinion that WEN was facing a difficult environment over the TRADE (three weeks or less) and TREND (three months or more) durations.  Over the longer-term TAIL, we expressed a positive view on WEN, giving the company the benefit of the doubt pending lessons to be learned as remodel testing initiative is undertaken over the next six months or so. 


Currently, as we wrote above, we don’t have a view on Wendy’s over the TAIL duration, but remain bearish on the TRADE and TREND.  Wendy’s is behind the curve in the QSR space and requires a staggering amount capital investment to right itself.   




Our thoughts on the Wendy’s presentation today can be boiled down to three key points.  1) In order to fix the asset base and make the concept competitive with category leaders, more than $3.7 billion will have to be spent.  2) The company effectively admitted that its older stores are substandard and are hindering any improvement in consumers’ perception of the Wendy’s brand.  3) Even if they current strategy that the company is testing is the correct one – and it may not be – it will be difficult to persuade franchisees to go along with the level of investment required to turn the brand around. 


The table below shows the $3.7 billion and our calculation of that number.  It should be noted that the total remodeling program will cost much more as that calculation only includes the 70% of Wendy’s restaurants that require “Image Activation”.  Some additional stores require less extensive refreshing.


WEN: WOW - THE $3.7 BILLION FIX!!! - wen spending table


WEN: WOW - THE $3.7 BILLION FIX!!! - wen slide1


The question of where $3.7 billion is going to come from is especially bearish for WEN on the TAIL duration.  We would not be a buyer of this stock today.  While WEN endures this prolonged period of high capital spending, competitors will continue to proceed with already-well-underway remodeling programs that should, in our view, make the competitive environment for Wendy’s difficult. 





The company’s “Recipe to Win” is based on four reimaging the restaurants, people, experience, and the food.  Our main issue with this presentation is that the cost of this recipe, $3.7 billion, is going to significantly limit the earnings power of the company for a number of years.



ASSET BASE:  The company has just over 6,200 restaurants in North America.  The substandard condition of the units, relative to the competition, is hampering progress.  The company estimates that a sales life of 25% will result from remodels.  We would wait for that to be proven out and highly doubt, given the level of spending that the turnaround is going to require, that any upside will be missed from waiting on the sidelines.  At this point, the anecdote of customers saying “this can’t be Wendy’s” in the remodeled stores is not a positive.


EBITDA: Management did lower the bar on guidance, as we had suspected it would, bringing long-term EBITDA growth expectations down to high-single-digits from the prior 10-15% range.  We do not believe that high-single-digit EBITDA growth will happen for Wendy’s for at least three years.


SSS: The company is guiding to comps of 2-3% for this year.   This almost doesn’t matter given the massive capital that the company is now if need of to turn the brand around.  Over the longer term, management believes that an enhanced pricing strategy and marketing approach will help drive the top line.


BREAKFAST: No timeline was attached to the comments on breakfast.  This has been a difficult ask for Wendy’s operators given the real estate challenges and the dominance of McDonald’s in this daypart.  McDonald’s buying up billboards in test markets doesn’t help either. 


COGS: Guiding to 4-5% basket inflation for ’12.  Beef makes up ~20% of food and paper spend.  The company is planning to offset by menu mix.


TAX RATE: The tax rate is expected to be between 40% and 42% this year.



Howard Penney

Managing Director


Rory Green





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