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Bad Macro

This note was originally published at 8am on February 09, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 23, 2012

As we look at today’s set up for the S&P 500, the range is 10 points or -0.34% downside to 1353 and 0.39% upside to 1363. 












  • ADVANCE/DECLINE LINE: -652 (-660) 
  • VOLUME: NYSE 729.05 (-8.64%)
  • VIX:  18.19 0.00% YTD PERFORMANCE: -22.26%
  • SPX PUT/CALL RATIO: 2.15 from 1.42 (51.41%)


  • TED SPREAD: 41.03
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.02 from 2.00
  • YIELD CURVE: 1.72 from 1.71

 MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Jobless Claims, week of Feb. 18, est. 355k (prior 348k)
  • 9:45am: Bloomberg Consumer Comfort, wk of Feb. 19 (prior -39.8)
  • 10am: House Price Index (M/m), Dec., est. 0.1% (prior 1.0%)
  • 10am: Freddie Mac 30-yr mortgage
  • 10:30am: EIA Natural Gas storage
  • 11am: DOE inventories
  • 11am: Kansas City Fed Manu., Feb., est. 9 (prior 7)
  • 1pm: U.S. to sell $29b 7-yr notes


    • Obama speaks on economy, rising oil prices at University of Miami, 2:30pm
    • Quinnipiac Univ. releases poll of American voters on economy, women’s health and military service, healthcare reform, 6am
    • National Economic Council Director Gene Sperling, FTC Chairman Jon Leibowitz speak at White House event on privacy, noon
    • House, Senate not in session
    • EU Commissioner Michel Barnier speaks at U.S. Chamber of
    • Commerce on financial services sector risks, 1pm
    • U.S., North Korean officials meet in Beijing


  • First USDA forecast of 2012-2013 crop season may predict largest corn crop since World War II
  • German business confidence rose more than economists forecast to a seven-month high in Feb.
  • New York Fed said to seek bids for more of the mortgage bonds assumed in rescue of AIG
  • Silver Lake sees buyout firms focusing in on makers of telecommunications and mobile-phone gear this year
  • Deutsche Telekom posts U.S. contract subscriber losses, forecasts lower 2012 profit
  • FDA panels vote on Chelsea Therapeutics’ Northera in neurogenic orthostatic hypotension, Forest Labs/Almirall’s aclidinium bromide in COPD
  • Google said it would support industry agreement to introduce a “do-not-track” button that will be embedded in Web browsers
  • Warner Music owner Len Blavatnik said to still pursue EMI recorded music unit
  • Apple holds first annual meeting since death of Steve Jobs


    • Sears Holdings (SHLD) 6 a.m., $0.78
    • EchoStar (SATS) 6 a.m., $(0.19)
    • MetroPCS Communications (PCS) 6 a.m., $0.16
    • Iron Mountain (IRM) 6 a.m., $0.29
    • DISH Network (DISH) 6 a.m., $0.61
    • Trina Solar (TSL) 6:15 a.m., $(0.43)
    • Hormel Foods (HRL) 6:30 a.m., $0.48
    • Loblaw (L CN) 7 a.m., C$0.66
    • Patterson Cos (PDCO) 7 a.m., $0.50
    • Kohl’s (KSS) 7 a.m., $1.80
    • American Tower (AMT) 7 a.m., $0.29
    • Plains Exploration & Production Co (PXP) 7:25 a.m., $0.36
    • Public Service Enterprise Group (PEG) 7:25 a.m., $0.48
    • Tim Hortons (THI CN) 7:30 a.m., C$0.62
    • Target (TGT) 7:30 a.m., $1.39
    • Omnicare (OCR) 7:30 a.m., $0.56
    • CMS Energy (CMS) 7:30 a.m., $0.15
    • Ameren (AEE) 7:42 a.m., $0.15
    • Liberty Media - Liberty Capital (LMCA) 8:30 a.m., $0.40
    • Liberty Interactive (LINTA) 8:30 a.m., $0.38
    • Denbury Resources (DNR) 8:30 a.m., $0.34
    • Safeway (SWY) 9 a.m., $0.64
    • WPX Energy (WPX) Pre-mkt
    • WebMD Health (WBMD) 4 p.m., $0.29
    • TiVo (TIVO) 4 p.m., $(0.19)
    • SBA Communications (SBAC) 4 p.m., $(0.23)
    • Gap (GPS) 4 p.m., $0.42
    • American International Group (AIG) 4 p.m., $0.56
    • Crocs (CROX) 4 p.m., $0.04
    • Molycorp (MCP) 4:01 p.m., $0.40
    • Marvell Technology Group (MRVL) 4:02 p.m., $0.17
    • Autodesk (ADSK) 4:02 p.m., $0.45
    • Live Nation Entertainment (LYV) 4:05 p.m., $(0.31)
    • Salesforce.com (CRM) 4:05 p.m., $0.40
    • SandRidge Energy (SD) 4:05 p.m., $(0.02)
    • Monster Beverage (MNST) 4:10 p.m., $0.37
    • KBR (KBR) 4:14 p.m., $0.64
    • Northeast Utilities (NU) 4:26 p.m., $0.69
    • HealthSouth (HLS) 4:30 p.m., $0.31
    • Westar Energy (WR) 5 p.m., $0.15
    • Public Storage (PSA) 5 p.m., $1.58
    • Magna International (MG CN) 5 p.m., $1.02
    • Ansys (ANSS) 5:03 p.m., $0.70
    • Iamgold (IMG CN) 5:15 p.m., $0.34



We were looking for a way to bridge the gap between what Inflation Expectations are doing (last price) and what partisan politicians are saying about oil prices this morning. In a globally interconnected marketplace of colliding factors, to call this rip to $124/barrel in oil prices simply a function of “Iran” is as simple does – un-American and uninspiring.

Multi-factor, Multi-Duration.

    1. Oil is up +13.3% in the last month
    2. Oil is up +160% in the last 3 years
    3. Oil is up +480% in the last 10 years 
  • Barrick’s Regent Sees Gold-Stock ‘Inflection Point’: Commodities
  • Gas Swings at 2-Year High as U.K. Flaws Exposed: Energy Markets
  • Brent Oil Rises to Nine-Month High on German Business Confidence
  • Copper Swings Between Gains, Losses on Oil Prices, Confidence
  • Wheat Declines as Global Stockpiles May Increase to a Record
  • Robusta Coffee Rises as Bets on Higher Prices Surge; Sugar Gains
  • Gold May Gain in London as Dollar’s Drop, Low Rates Spur Demand
  • Armajaro Cuts Cocoa Shortage Forecast by 50% on Port Deliveries
  • U.S. Eyes Record Corn Crop as Farmers Boost Acreage to 1944 High
  • Transocean Bonds Gain on Move to Avoid Junk: Corporate Finance
  • Aluminum Premiums Poised to Climb on Supply Outlook, CRU Says
  • Corn Imports by China Seen Increasing Sevenfold on Demand
  • Palm Oil Set to Rally Above $1,300 by Midyear, Coleman Says
  • Shell’s Cove Bid Starts Race for East African Gas Fields: Energy
  • BHP Record Bond Offering Taps Commodity Hunger: Australia Credit
  • Tin Exports From Indonesia in Quarter Seen Lowest Since 2010
  • Corn Futures in Dalian to Extend Decline: Technical Analysis 






















The Hedgeye Macro Team


CHART OF THE DAY: Politics and Prejudice


CHART OF THE DAY: Politics and Prejudice - Chart of the Day

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Politics and Prejudice

“Politics and prejudice keep pushing their way into things.”

-Izzeldin Abuelaish


I’m often inspired by doers in this world. Instead of pandering to the political wind, they simply lead by example. Their respect is earned each and every day, not centrally allocated.


The aforementioned quote comes from a Palestinian doctor who was educated in Cairo and at Harvard. He practiced in both Saudi Arabia and Israel, and now lives in Canada. His story is called “I Shall Not Hate”, and I highly recommend reading it if you’re looking for cultural context in analyzing the Middle East.


The last decade has been a particularly disappointing period in this grinding conflict that keeps us apart. Our leaders bicker like children, breaking promises, behaving like bullies, keeping the kettle of trouble boiling. The people I talk to – patients, doctors, neighbors in Gaza, friends in Israel – are not like our leaders.” (I Shall Not Hate, page 121)


Until he mentions Gaza, you’d think he was writing about the 112th US Congress. But what is it about Iran or Illinois that keeps us from having a discussion about economic facts? Why are we wedded to Western Academic Dogmas gone bad? Why are we so partisan?


Unlike debating science and math (where there are actual answers to the questions), American economic opinions, strategies, and forecasts are heavily weighted to Politics and Prejudice – and massively underweight transparency, accountability, and trust.


Back to the Global Macro Grind


I was looking for a way to bridge the gap between what Inflation Expectations are doing (last price) and what partisan politicians are saying about oil prices this morning. In a globally interconnected marketplace of colliding factors, to call this rip to $124/barrel in oil prices simply a function of “Iran” is as simple does – un-American and uninspiring.


Multi-factor, Multi-Duration.

  1. Oil is up +11.7% in the last month
  2. Oil is up +193.4% in the last 3 years
  3. Oil is up +503.3% in the last 10 years 

This, of course, is what The Bernank calls The Deflation.


Iran is definitely a factor. But it’s certainly not the only factor. Having a dual mandate (monetary and fiscal policy) to debauch the Dollar puts the world’s reserve currency in a position where we are all subject to more volatility associated with “external shocks.”


If that’s not the case, why didn’t Oil go to $130 or $150 during the Reagan and/or Clinton years? There were plenty of Middle Eastern, Russian, and US supply scares over the course of the 1980s and 1990s, weren’t there?


Ah, but there was also a global expectation for Strong Dollar Policies from both the Reagan and Clinton Administrations: 

  1. Monetarily: Reagan was Strong Dollar (Volcker raising interest rates and the rate of return on American Savings, again, and again)
  2. Fiscally: Clinton was Strong Dollar (Balanced Budget Act 1997 and the only President since Truman to run 3 consecutive surpluses) 

Got Politics and Prejudice?


Oh there is plenty folks. But the beauty of being Canadian this morning is not only that we have Steven Harper instead of Santorum, but we can sit back and not be Republican or Democrat about this. Economic policy context here is critical, because when it comes to the last decade of Bush/Obama, both of these Presidents are much more like Nixon/Carter than anything else – Keynesians.




Abuelaish says one thing they haven’t tried in the Middle East is empowering women to make decisions. I like that, because the American men running economic policy couldn’t be worse. And by the way, the only major head of State to be Strong Currency (both fiscally and monetarily) in the last 40 years was Margaret Thatcher. If I was Mitt Romney, I’d be doing the required Hayekian reading on that, fast.


In other news: 

  1. Japan – Former BOJ deputy chief Muto says the Japanese fiscal and monetary situation has reached a “trigger point”
  2. China – Premier Wen is whispering about cutting China’s GDP run rate below 8% at the National People’s Congress (March 5th)
  3. Europe – Economic Stagflation (rising inflation, slowing growth) is back in the headlines instead of Greece 

Maybe we should blame Iran (or Canada?) for Big Government Policies to inflate slowing global growth again too?


Macro Math on what those big 3 represent as a % of total Global GDP: 

  1. Japan = 9.3%
  2. China = 11.1%
  3. European Union = 28.1% 

So, that’s only 48.4% of the world’s economic output. I guess it’s a really good thing that Bernanke sees no inflation slowing real (inflation adjusted) economic growth in America. Sadly, Politics and Prejudice have made us willfully blind.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $119.45-123.86, $79.01-79.47, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Politics and Prejudice - Chart of the Day


Politics and Prejudice - Virtual Portfolio

KSS: Resistance is not Futile

Don't give in to temptation to support this name on the guide-down. 


No major surprises in the KSS print. Guidance was well below the Street, but about in line with our model. We like KSS realistic approach to 2013 – a year that will be marred by price competition from JCP, TGT, AMZN, SHLD, M and WMT. 


Here are two major factors to consider...

1.  The base business simply is not growing, and this was in a decent year overall for he industry. 

  • E-commerce reached $1bn in revs growing at 39% for the year, which contributed 1.5% to total top-line growth accounting for 70% of sales growth.
  • KSS’ total revenue growth in F11 was 2.2%.
  • If we assume e-commerce grows at a similar rate this year it would account for 2% total top-line growth; Guidance calls for 4.5% growth overall.
  • Backing into new store productivity contributions for Q4, new store growth accounted for 2% total growth this past year. 
  • That would imply that e-com and new store growth = +3.5% vs. total at +2.2% = core contraction

2. The sales/inventory spread (see our SIGMA) eroded the most in over four years. That said, we did not see a capitulation in Gross Margins - the combination of which is very GM-bearish. 


Resist temptation to buy on a sell off here. 


KSS: Resistance is not Futile - KSS SIGMA




Rice and coffee prices were the big outlier to the downside over the past week.  This is good news for PFCB and, particularly, the coffee companies like SBUX, PEET, DNKN, THI, GMCR, and CBOU.


The dollar showing weakness over the last week has coincided with strong price gains for most of the agricultural commodities that we follow.  Gold, oil and the XLE also posted strong year-over-year gains as the Federal Reserve continues to, as Keith wrote in this morning’s Early Look, “legislate inflation”. 







Gasoline Prices are creeping higher around the country with $4.00/gallon gas in California and media reports emerging of some gas stations demanding $6.00/gallon in Florida.  At some point, this will negatively impact consumer spending.









TXRH: We expect approximately 8% food inflation in 2012, primarily due to higher beef costs…on the beef side we do have fixed price – pricing arrangements in effect for over 90% of our beef costs in 2012.


CBRL: To the continued pressure on ground beef prices and other commodities partly offset by lower average dairy and produce prices, along with benefits from our supply chain initiatives, we expect cost of sales to increase 60 basis points to 80 basis points over 2011 to near 26% in 2012.


RUTH: We project 2012 beef inflation to be between 5% and 8%. We currently have purchase agreements for beef representing approximately 30% of our needs through August of 2012, which represents an approximate 7% premium compared to the prior years.


CMG:  While we're cautiously optimistic we'll see more reasonable prices in 2012 for avocados, dairy and produce, we expect these benefits will be more than offset by higher costs for our beef, chicken, rice and beans. Beef costs will be especially challenging due to protracted supply shortages, despite recent reductions in grain prices.


MCD: As we look at our guidance for 2012, we've built another mid-teens increase for beef, expecting that the dynamics in the marketplaces that we see, and are expecting, will continue.


SONC: One item to note is that we recently locked in our beef contract for calendar year 2012… given the potential for beef costs going even higher, which there are a lot of reports out there that speculate that could happen, that we chose to go with making this more of a known quantity here, and the idea of having a set price for the next 12 months, we feel like would be good for our business, adds some predictability to the business.





PEET: We expect 2012 coffee costs to rise 12% instead of last year's 42%.


SBUX: We've taken advantage of the recent declines in the C-price to lock in more of our coffee needs for fiscal 2013. We now have six months of our fiscal 2013 requirements secured at costs moderately favorable to 2012.





TXRH: The volatility around that 8% estimate for food cost inflation would really be driven by produce and dairy.  Those are of the biggest components that we float around the market, and that's about 15% to 20% of our total cost of sales.


CMG: While we're cautiously optimistic we'll see more reasonable prices in 2012 for avocados, dairy and produce, we expect these benefits will be more than offset by higher costs for our beef, chicken, rice and beans.







Beef prices are a significant input cost for many restaurant companies.  The chart of beef prices in the last section of this post shows that prices are now up 17.3% year-over-year, despite the fact that prices have been up year on year for over two years now.  TXRH said that it expects 8% food inflation in 2012 primarily due to higher beef costs.




Texas AgriLife Extension Service personnel, according to CattleNetwork, said that most of Texas received rain in the third week of February, helping to green up pastures and winter wheat.


Total frozen beef supplies were up 7% on January 31st, 2012 versus last year.


An investigation by the federal Canadian Food Inspection Agency has resulted in charges against a Manitoba veterinarian and livestock operators for illegally and intentionally exporting cattle in breach of U.S. and Canadian laws.

Canadian beef supplies have been shrinking since 2005 and are likely to shrink further in the short-term according to statistics released by the Canadian government Monday.  The Canadian beef cow herd is down 20% from its peak in ’05 despite shipments to the U.S. being down 24% in 2011 versus the year prior and cow slaughter rates being off 13%.  The numbers, according to CattleNetwork, do not add up.  The ag website does say, however, that the North American calf crop is down roughly 9% in the past 10 years. 


Analysts are expecting U.S. feedlots to have reduced cattle purchases in January as supplies of available animals declined.  On Friday, the USDA will release inventory estimates at 3 p.m.




The lead February contract in overnight electronic action hit an all-time high of 129.05 cents, surpassing Tuesday’s 128.97 top and indicating strong demand.


Cattle in the Chinese region of Ningxia Hui were found to have foot-and-mouth disease.







Coffee dropped significantly as stockpiles climbed and producers sought to increase sales in Brazil, the world’s top grower. 


Coffee inventories monitored by ICE Futures U.S. have jumped 24% since the end of October. 


Brazilian permits for exports February to-date surged 26% versus January, according to Cacafe, Brazil’s Council of Coffee Exporters.




Coffee speculators decreased their net-long position in coffee futures in the week ended 2/14. 



Chicken Wings - BWLD




Total frozen poultry supplies on January 31st, 2012 were down 11% year-over-year.


Brazil may boost broiler-chicken production by 3% to a record 13.25 million metric tons in 2012 versus 12.9 million in 2011, according to the USDA.  The increase is down from an earlier forecast of 5% growth in production. 


The six-week moving average egg sets number declined sequentially from -5.46% for the week ended 2/11 to -5.49% for the week ended 2/18.  This is a bullish data point for chicken wing prices; supply is not showing any sign of picking up quickly and beef costs remain at extremely high levels.


WEEKLY COMMODITY CHARTBOOK - egg sets vs wing prices






























Chicken – Whole Breast


WEEKLY COMMODITY CHARTBOOK - chicken whole breast



Chicken Wings















Howard Penney

Managing Director


Rory Green


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 80.48%
  • SHORT SIGNALS 78.35%