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Bad Macro

“The macro is so bad everywhere.  In America, our political leadership is doing nothing to help us get out of the current situation.  Worldwide, Europe is just in a state of financial collapse.  I think we are in plenty of trouble and have to watch ourselves closely.”

-Julian Robertson on CNBC, September 13th, 2011


While Julian Robertson is retired from managing other people’s money, prior to his retirement he established probably the best long term record of any money manager with a reported annual return of north of 30% from 1980 to 1998.  More impressive to me has been his ability to mentor, train, and seed successful money managers after retiring from the business himself.


I’ve had the pleasure of meeting Mr. Robertson a number of times.  The most notable for me was while I was attending Columbia Business School  and took a class called, “The Analyst’s Edge”, which was taught by John Griffin, founder of Blue Ridge Capital and the former President of Tiger Management.  This class offered me, and my fellow students, a crash course in analyzing companies from the practitioner’s perspective.  In lieu of a final exam, our final grade was based on pitching a stock to Julian Robertson in the Tiger Management boardroom. 


Not only was the situation itself intimidating, but the company I had spent the semester researching was Ace Aviation, more commonly known as Air Canada.   As background, in 1999, the year that Tiger Management dramatically underperformed the SP500 and eventually shut its doors, U.S. Airways was purportedly Tiger’s largest equity holding and a key reason for the underperformance.  So, yes, I was pitching an airline to Mr. Robertson, even though it was the industry that had burned him a few short years before.


Shockingly, despite my somewhat sweaty palms, the pitch actually went relatively well.  Mr. Robertson was very thoughtful in his questions as it related to my thesis, which was primarily based on a sum-of-the-parts analysis, and seemed very intrigued by the idea.  Now, of course, he may have just been trying to be polite, but I think the better answer is that a key reason he was, and remains, one of the world’s great investors, is his ability to have an open mind and change opinion.  In effect, he showed incredible mental flexibility.


I highlighted the quote above to flag the simple fact that Mr. Robertson went on CNBC to emphasize how negative the macro was at the literal 2011 bottom of the stock market.  In fact, since September 13th, 2011 the SP500 is up more than 15% and the Euro Stoxx 100 is up more than 23%.  On an annualized basis, those moves would equate to some of the best annual equity index returns in the last hundred years.  So, was Julian Robertson wrong based on his dour September 13th, 2011 macro outlook?  Well, that ultimately depends how his portfolio was positioned for the last four months.  My guess is that Mr. Robertson and his protégées managed the environment quite effectively and kept their feet moving.


Interestingly, on September 13th our CEO Keith McCullough (he is on the road today in Boston) wrote the Early Look and while we shared an eerily similar fundamental view as Mr. Robertson, Keith wrote the following that morning:


“Great short sellers in this game have one thing in common – they know when to cover . . . I’ve written 2 intraday notes in Q3 of 2011 titled “Short Covering Opportunity” (one on August 8th and one yesterday). Yesterday’s call to cover shorts generated as much questioning and feedback as any time I think I have ever made a call to cover shorts since the thralls of early 2009. This is an important sentiment indicator.”


In hindsight, making the aggressive short covering call on September 12th of last year was the correct call.  Some might call it luck, but for us it was born out of our global macro process.  Now, arguably, we probably should have gotten even more aggressively long.  As always though, the first step in the stock market business is to not lose money.


Coming into 2012 we were as bullish as we’ve been in awhile.  One of our key 2012 macro themes was that the rate of global growth slowing would bottom.  In our macro models, marginal rates of change in growth are critical, but as critical is monetary policy, which influences growth.  On January 25th of 2012, the FOMC released the policy statement post their December meeting, with the key line being:


“In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”


So, in one fatal swoop, The Bernank extended the Federal Reserve’s depression level monetary policy out another year.  Monetary policy influences our outlook on inflation, which influences our outlook on growth and equity returns.  Hence, we reversed course following the FOMC policy statement noted above.  Now, maybe that’s Bad Macro, or maybe it’s smart macro.  The data suggests it’s the latter.


In the Chart of the Day, we’ve attached an analysis that looks at inflation versus the price to earnings ratio of U.S. equities from 1978 to 2008.  The r squared between CPI, the proxy for inflation, and P/E is very highly correlated at 0.76. As the curve demonstrates, inflation is bad for equities.  That’s not a guess, that’s a fact based on the data and underscores our shift in outlook post the FOMC statement in January.  Some call this mental flexibility, for us it is process. So far, by the way, we’ve been wrong on U.S. equities in the shorter term duration.  That said, fighting the Fed worked in 2011.


While I am on the topic of Julian Robertson this morning, I would like to give him credit for more than being one of the best money managers of our time and an incredible mentor of young money managers. I would also like to acknowledge his leadership in philanthropy.  As Albert Einstein said:


“The value of a man resides in what he gives and not in what he is capable of receiving.”




Our immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, and the SP500 are now 1717 – 1761, 113.42 – 118.27, 1.31 – 1.33, 78.51 – 78.94, and 1330 – 1360, respectively.


Keep your head up and your stick on the ice,


Daryl G. Jones

Director of Research


Bad Macro - EL Chart 2 9


Bad Macro - VP 2 9


TODAY’S S&P 500 SET-UP – February 9, 2012

As we look at today’s set up for the S&P 500, the range is 30 points or -1.48% downside to 1330 and 0.74% upside to 1360. 












  • VOLUME: NYSE 765.35 (4.99%)
  • VIX:  18.16 2.89% YTD PERFORMANCE: -22.39%
  • SPX PUT/CALL RATIO: 1.40 from 3.12 (-55.13%)


  • TED SPREAD: 43.69
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.00 from 1.98
  • YIELD CURVE: 1.75 from 1.73

MACRO DATA POINTS (Bloomberg Estimates):

  • 6:30am: OPEC monthly crude output report
  • 7am: BoE announces interest rate decision; est. 0.50%, unchanged
  • 7:45am: ECB announces rate decision, est. 1%, unchanged
  • 8:30am: Initial jobless claims, week of Feb. 4, est. 370k (prior 367k)
  • 8:30am: WASDE
  • 9:45am: Bloomberg Consumer Comfort, week of Feb. 5 (prior -44.8)
  • 10am: Freddie Mac 30-yr mortgage
  • 10am: Wholesale Inventories, Dec., est. 0.4% (prior 0.1%)
  • 10:30am: EIA natural gas storage
  • 1pm: U.S. to sell $16b 30-yr bonds


  • President Barack Obama meets with Italian Prime Minister Mario Monti in Oval Office, TBA
  • U.S. Postal Service, which may run out of money this year, reports quarterly results after 8:30am
  • Conservative Political Action Conference begins in D.C., with speakers including Mitt Romney, Newt Gingrich, House Speaker John Boehner, Sen. Marco Rubio, Gov. Bobby Jindal, Sarah Palin
  • House, Senate in session:
    • House meets at 9am to consider amendments to bill on insider trading
    • Senate Judiciary marks up bill on televising Supreme Court proceedings, votes on federal judge nominations, 10am
    • House Energy and Commerce holds hearing on proposed generic, biosimilar user fees, drug shortages, 10am
    • Mark Zandi, chief economist at Moody’s, testifies before Senate Banking on housing market, 10am
    • Senate Budget hearing on inequality, mobility, 10am


  • Greek finance minister heads to Brussels after politicians failed to finalize new austerity measures needed to secure $173b bailout package
  • Southern Co. gets regulator vote on bid for first permission in 30 years to build nuclear reactors in Ga., noon
  • Pepsi releases earnings; watch for commentary on restructuring, strategic shifts following business review
  • President Barack Obama’s advisers have grown more confident about U.S. economic growth this year
  • Bank of England, ECB issue rate decisions; both estimated to keep rates unchanged.
  • Diamond Foods ouster of CEO, CFO, restatement of financial data, imperil Pringles deal with P&G
  • USDA Wasde report, 8:30am
  • BP said to be negotiating with U.S. to settle pollution claims over the 2010 Gulf of Mexico oil spill
  • Credit Suisse posts unexpected 4Q loss, hurt by “adverse” markets and reorganization costs
  • California, New  York said to agree to join more than 40 other states in a nationwide settlement that seeks to end abusive bank foreclosure practices


    • Precision Drilling (PD CN) 6 a.m., C$0.34
    • Alexion Pharmaceuticals (ALXN) 6:30 a.m., $0.34
    • Bunge Ltd (BG) 6:30 a.m., $1.53
    • Coca-Cola Enterprises (CCE) 6:30 a.m., $0.36
    • Flowers Foods (FLO) 6:30 a.m., $0.21
    • Teradata (TDC) 6:55 a.m., $0.62
    • Philip Morris International (PM) 6:59 a.m., $1.09
    • BCE (BCE CN) 7 a.m., $0.66
    • CBOE Holdings (CBOE) 7 a.m., $0.35
    • Dunkin’ Brands Group (DNKN) 7 a.m., $0.28
    • Fortis (FTS CN) 7 a.m., C$0.47
    • International Flavors & Fragrances (IFF) 7 a.m., $0.71
    • Lorillard (LO) 7 a.m., $1.96
    • PepsiCo (PEP) 7 a.m., $1.12
    • Sirius XM (SIRI) 7 a.m., $0.01
    • Thomson Reuters (TRI CN) 7 a.m., $0.56
    • Brookfield Infrastructure Partners (BIP) 7:30 a.m., $0.36
    • Husky Energy (HSE CN) 7:30 a.m., C$0.55
    • Noble Energy (NBL) 7:30 a.m., $1.16
    • Och-Ziff Capital Management Group LLC (OZM) 7:30 a.m., $0.02
    • Sealed Air (SEE) 7:30 a.m., $0.49
    • Sigma-Aldrich (SIAL) 8 a.m., $0.89
    • Manulife Financial (MFC CN) 8:04 a.m., C$(0.10)
    • Canadian Tire Ltd (CTC/A CN) 8:05 a.m., C$1.85
    • Shoppers Drug Mart (SC CN) 10:30 a.m., C$0.82
    • Great-West Lifeco (GWO CN) 12:05 p.m., C$0.50
    • Expedia (EXPE) 4 p.m., $0.52
    • Nuance Communications (NUAN) 4:01 p.m., $0.36
    • Pitney Bowes (PBI) 4:01 p.m., $0.60
    • XL Group (XL) 4:01 p.m., $0.15
    • Lions Gate Entertainment (LGF) 4:02 p.m., $0.11
    • LinkedIn (LNKD) 4:02 p.m., $0.07
    • Activision Blizzard (ATVI) 4:05 p.m., $0.56
    • Republic Services (RSG) 4:05 p.m., $0.45
    • Cameco (CCO CN) Post-Mkt, C$0.40


  • Hedge Fund Snaps Seven Annual Gains in ‘Ugly Year’: Commodities
  • Oil Rises an Eighth Day in London on Euro Optimism, Cold Snap
  • World Food Prices Rose Most in 11 Months on Oilseeds, Grains
  • Copper Swings Between Gains, Losses on China Inflation, Stocks
  • Cocoa Falls After Exporters Agree on Ivorian Rules; Coffee Gains
  • Gold May Gain as Dollar’s Decline Spurs More Demand for Metal
  • Wheat May Fall as Australian Exports Increase; Corn Declines
  • India to Sustain Rice Sales to Iran, Seeking to Boost Trade
  • BP Said to Seek U.S. Settlement of Gulf Spill Pollution Claims
  • Rio Tinto Swings to Second-Half Loss on Aluminum Charge
  • Refinery Closing Threatens Virgin Islands’ Debt, Employment
  • Japan Offers $65 Million in Subsidies to Cut Rare Earth Reliance
  • Europe Coal Loses to South Africa on Renewables: Energy Markets
  • North Dakota Oil Boom Brings Bakken Price Bust: Chart of the Day
  • Gazprom Yields Soar as Tax Plan Spooks Investors: Russia Credit
  • Glencore Price for Xstrata Rises Amid No Vote Threat: Real M&A
  • Rabobank May Boost Global Farmer Funding 20% to Offset Europe





















The Hedgeye Macro Team


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Strong employment trends and favorable weather versus last year has translated into strong top line trends in 4Q and 1Q to date for companies across the restaurant space.  As the benefit of weather fades and compares become more difficult from a top-line perspective as we move through the year, we would expect commodity costs to play a greater role in stocks with exposure to certain commodities.  On aggregate, 2011 was a year where the restaurant space was under pressure from a commodity inflation perspective but strong sales helped most companies leverage COGs.  With overall commodity inflation abating in 2012, and sales trends remaining strong, many expect restaurant companies to continue to post impressive earnings growth.  We agree with that view but think that there are companies that are facing significant exposure to protein costs that may pressure profit margins for FY12 more than expectations are anticipating. 









Beef prices are a factor for most of the restaurant companies we follow but WEN (20% of food and paper spend), JACK (20% of commodity basket), TXRH, and CMG are especially exposed.  The chart of live cattle prices, in the “charts” section of this post, below, shows just how far prices have run. Grain prices are holding up at current (elevated) levels and that does not bode well for those hoping for beef prices to snap back.




The U.S. cattle inventory is down 1.9% from a year ago and 6% from the January 2007 peak.   While a decline in cattle numbers from a year ago was expected, the drought of summer 2011 that affected the cattle industry added to the liquidation and inventory came in even lower than expectations.  Jim Ross, of the Livestock Marketing Information Center, said in an interview with CattleNetwork that he expects no significant increase in U.S. beef production until at least 2015 as other countries are only beginning to cut production now. 




Increasing export demand from emerging markets remains supportive for beef prices.  We will be watching broad economic trends and the U.S. dollar to assess how demand is likely to impact beef prices.  Supply, at least recently, has been the most important factor in driving such high prices over the last nine months.





Coffee prices gained 2.8% week-over-week but are almost 11% below last year’s levels.  SBUX has its coffee costs locked through most of 2013.  The company is past the peak of the inflation seen in coffee prices, according to management commentary on its most recent earnings call (1/26).  Coffee costs have impacted PEET heavily and, as of the company’s most recent earnings call on 11/1/11, inflation had gotten ahead of pricing.  While coffee prices have come down, it seems that supply and demand dynamics are likely to support prices or, at least, make a drastic decline from here unlikely.




Global coffee production for 2011/12 will be 130.9 million bags, down from last month’s estimate of 132.4 million bags, according to the International Coffee Organization. 




Coffee shipments from Brazil, the world’s largest producer and exporter, fell 26% in January from a year earlier. 


Global coffee consumption for 2011/12 will be 136.5 million bags versus 135 million bags in 2010 due to increased demand from emerging markets, according to the International Coffee Organization.



Chicken Wings – BWLD


Commodity cost inflation for BWLD will step up in 1Q with 2Q being the most unfavorable compare if prices remain elevated, as wing prices bottomed in 2Q10.




The six-week moving average egg sets number declined sequentially from -5% for the week ended 1/28 to -5.3% for the week ended 2/4.  This is a bullish data point for chicken wing prices.




As beef prices go higher, we expect the food service industry to shift focus to chicken to alleviate cost pressures.































Chicken – Whole Breast





Chicken Wings















Howard Penney

Managing Director


Rory Green


Greek PSI Is NOT Getting Done

Positions in Europe: Short EUR/USD (FXE); Short France (EWQ)


…or at least not anytime soon, like in the next day or two. 


Expectations are high, and as the calendar of events below shows, there’s much in the way of a quick sign-off on the PSI. While we ultimately think that some deal will get done, the artificial deadlines will continue to be ignored along the way as multiple parties must be in agreement. Ultimately, the final deadline on PSI must be Greece’s €14.5B debt maturity coming due on March 20th. We think Eurocrats will continue to push out the calendar, and ultimately decide on some 11thhour compromise.  However, expect the goal posts from the relevant parties involved to change in between time, which will continue to influence the EUR/USD.  Again, Eurocrats are suspending reality, which makes us concerned about taking any absolute directional macro bets on the region.


That said, Keith shorted France via the etf EWQ today in the Hedgeye Virtual Portfolio, and he re-shorted the EUR/USD (FXE). Below we provided updated levels on the EUR/USD and France’s CAC, and explain our concerns around France’s growth prospects and fiscal outlook.



The Road to a PSI Deal:

-Unsubstantiated reports continue to swirl and the road to agreement is convoluted with numerous parties that must come to agreement. What’s involved is 1.) the PSI, the terms of which are rumored to include a swap for 30YR bonds with a coupon as low as 3.6% (or approximately a 70% loss), intended to reduce €100B off more than €200B of privately held Greek debt, and 2.) pursuant to the passage of the PSI, further fiscal consolidation measures, including a cut in the minimum wage, lower pensions, and immediate layoffs for as many as 15,000 state employees to put in motion approval for Greece’s second bailout package of €130B+.


Here’s the latest:


1.  Papademos met with the Troika until 4am this morning and reports indicate that the Greek party leaders have now received their draft document on a loan deal and are reviewing it. Private sector wage and pension cuts appear to remain the key obstacle to gaining support.


2.   According to the WSJ, the ECB may now make concessions by exchanging its Greek bonds with the EFSF at below face value if debt restructuring talks are successful, to contribute an estimated € 11B to overall debt reduction. Hedgeye Counter:  up until now the ECB (Draghi) has vehemently stated that it will not participate in the PSI. The logic didn’t make total sense, but the take away is that the ECB did not want to take a loss on its holdings.  Is the ECB really shifting its stance?


3.   The leaders will meet around 1pm local time (6am EST) today to discuss and then sit down with Papademos at 3pm (8am EST). 


4.  If they can get everyone on board, they can present the plan to the Eurogroup Finance Ministers by the end of the week and Greece’s Parliament can potentially vote on it this Sunday


5.   An unconfirmed source says that a formal offer for the debt swap must be made by February 13th to allow all procedures to be completed before the March 20th €14.5B bond comes due.


6.   However, even if points 1-4 get a mutual agreement, German lawmakers in particular (and perhaps legislative bodies of other Eurozone countries as well), may well veto it across:

  • The exchange of ECB’s Greek bonds with the EFSF
  • The PSI terms
  • The second Greek bailout package terms

Given, we think the timeline will be pushed out, especially pursuant to how many national parliaments decide to take these measures to vote.



Shorting France (EWQ):

Today Keith shorted France via the eft EWQ in the Hedgeye Virtual Portfolio. From a long-term TAIL perspective, the French stock market remains bearish. We've waited and we've watched - Greece is not our catalyst—French growth and an expanding public debt (as a % of GDP) are. We think growth will undershoot estimates of 0.0% this year as Sarkozy or the future candidate (based on presidential elections in April-May) struggle to push through budget cuts needed to trim the deficit by 1.4% to put it on target to reach 3% in 2013. Further, we see its debt, which may expand to 90% (of GDP) as a structural impairment to growth, a level that has been proven by economist Reinhart and Rogoff in their seminal book “This Time is Different”


Greek PSI Is NOT Getting Done - a. CAC


Re-Shorting the EUR/USD (FXE):

Keith re-shorted the EUR/USD pair that it is finally immediate-term TRADE overbought with intermediate-term TREND resistance overhead at $1.34. Given the vast uncertainty surrounding the Greek PSI and the country’s second bailout package, we’d expect more downside in the cross as Eurocrats fumble with an agreement.


Greek PSI Is NOT Getting Done - a. EUR


Matthew Hedrick

Senior Analyst


In preparation for MPEL's Q4 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • MPEL is looking to raise $2 billion for its Macau Studio City project.  The debt funding will feature a loan-and-bond combo with the loan expected to be for around US$1.25BN and the US dollar bond for the remainder, according to another source.  The borrower is in discussions with banks for the loan financing and is seeking underwritten commitments. 
  • Melco's last visit to the loan markets was in May 2011 when it raised US$1.2BN through a dual-tranche financing comprising of an US$800MM term loan and a US$400MM revolver (deal priced all-ins of 208-308bp over LIBOR). The term loan amortizes to 50% and has a two-year grace period. The blended average life is 4.1 years.






  • "We continue to see the expected supply outlook for both hotels and tables as supporters of a managed growth profile for Macau, providing an environment for sustainability for the overall gaming sector. However, we believe the regulated table supply outlook will benefit those operators who have exposure and are most leveraged to take advantage of the shift in the gaming epicenter to Cotai."
  • "We continue to see improvements in our key mass market metrics, including our mass table gain in core percentage at City of Dreams where we have revised our expected mass hold percentage to a range of 23% to 26%. This compares to our range in 2010 of 20% to 22%.  We believe this increase is sustainable and reflects various operational initiatives put in place over the last 12 to 18 months."
  • "Total depreciation and amortization expense is expected to be approximately $90 to $95 million, corporate expense is expected to come in at $18 million to $20 million and net interest expense is expected to be approximately $30 million."
  • "We're working closely with the Macau government. We have submitted various documents into the government. And so subject to their approval and going through the regular processes, we hope to restart construction for Studio City in the first quarter. So I think in terms of, from a design standpoint, I think we are quite advanced in the conceptual design space. So we're pretty much ready to go."
  • "What we have to look is actually at the existing liquidity and also the metric that we're building the operation. I don't see any evidence so far, seeing any correlation of the liquidity and problems that we all have heard in China at the moment. In terms of the mass, I think we still see some growth more than the visitation number in Macau and in terms of volume growth there compared to Cotai, I think Cotai will start to pick it up faster than the peninsula side, and I think that will trend for the last one-and-a-half months starting from fourth quarter."
  • [Macau Studio City Capex] "We're in the midst of budgeting for 2012, but I think we should be someplace in the $75 million to $100 million CapEx for 2012."
  • "I think the depth of the market is very, very promising in Macau and we continue to focus on one segment, which is what we are strong at, which is the premium mass and the high end premium mass set."
  • "I think in respect to a few junket operator we are looking to the productivity in a very disciplined way. In terms of ramping up, I think so because we are looking for enhancement on the facility at the moment in COD especially in the VIP Level 2 area. And also we see more enhancement of facilities on this first quarter next year as well."

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