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CHART OF THE DAY: Don't Hate The Debate


CHART OF THE DAY: Don't Hate The Debate - Chart of the Day

Don't Hate The Debate

“You have to choose not to spiral into hate.”

-Izzeldin Abuelaish


On red yesterday I took up my positions in US Equities and Commodities to 12%, respectively, buying Utilities and Gold in the Hedgeye Asset Allocation Model. I also sold my entire US Dollar position (9%) on green. Don’t hate me for moving fast. Sometimes that’s just what I do.


‘Trading, Fast and Slow’ might be a good title for a new book (or maybe just a high-frequency tweet). It uses 3 words that some people in our business love to hate. Trading? Oh no, “I’m not a trader, I am an investor.” Ok. Do you invest fast or slow? Do you manage risk? Yes, we know – you actually have to trade to answer both of those questions.


While plenty of people from The Old Wall are just punching the over-compensation clock at this point, I think we have entered the thralls of creative destruction. These are the most exciting times of my 13-year career. There is so much to Re-think, Re-work, and Re-build.


We have an entire industry that needs to be debated. Every process. Every premise. Every minute of every day offers you an opportunity to not only get in the game, but be the change we all want to see in this profession.


If that sounds a little speechy, it’s because it is. As Ray Dalio at Bridgewater likes to say, this business is all about figuring out the truth. In the final pages of Izzeldin Abuelaish’s ‘I Shall Not Hate’, he comments on the same principles of risk management in the Middle East:


“I’m not talking about the light of religious faith here, but light as a symbol of truth. The light that allows you to see, clear away from the fog – to find wisdom. To find the light of the truth you have to talk to, listen to, and respect each other.” (page 196)


The partisan politics, economics, and investing styles that have failed us over the last 5yrs are broken. Don’t Hate The Debate. Embrace change and progress. We can always do better. We always have.


Back to the Global Macro Grind


One of the most heated debates I have with clients remains centered on the interconnectedness of the world’s reserve currency to market prices that are primarily denominated in that currency (US Dollars).


Since most of Western academia has not taught us to re-think markets this way, their dogma is now our dilemma. That’s why we need to slap on the accountability pants and hash this one out, fast. It’s time for the professors to be held accountable to the debate.


If you don’t think Fed Policy drives the US Dollar and Inflation/Deflation Expectations of assets priced in Dollars, try that theory at home with your own money. If the Fed were to even whisper about a rate hike, Oil and Gold would get hammered.


That’s why managing risk around big up/down moves in the USD is critical to getting Big Beta right. With the US Dollar Index up +0.8% on the day yesterday (one of its biggest up days of 2012), here’s what happened underneath the Globally Interconnected Market hood:

  1. Silver = down -6.9%
  2. Gold = down -5.5%
  3. Basic Materials (XLB) = down -1.9%

It’s a good thing the Dollar isn’t correlated to Apple.


Notwithstanding that the Chairman of the Federal Reserve didn’t mention the words (and hasn’t since 2006) CORRELATION RISK in his entire semi-annual testimony yesterday, we’re still not in the business of taking his word for it on what is or is not happening out there.


I know this is a touchy subject – particularly to the legions of Nobel Prize winners who get paid to be willfully blind to it. But this is America, not Russia. We, The People, have a fiduciary responsibility to hold central planners accountable.


Transparency, Accountability, and Trust?

  1. Transparency: Bernanke to Ron Paul yesterday on defining inflation - “I’ll talk to you about that offline”
  2. Accountability: Bernanke’s prepared remarks on his mandate for PRICE STABILITY -“as we expected, inflation was transitory”
  3. Trust: Bernanke on his forecasts – “my projections are considerably lower than last year”

Alrighty then.

  1. So there is no inflation because Bernanke chooses to define it with what’s just universally considered not true
  2. And as long as commodity markets oscillate between bubble and crash mode, price inflation/deflation is “transitory” and stable?
  3. And if you’re willing to take his word for it on forecasts that he’s had dead wrong, we can soft land this puppy perfectly

I really don’t hate the man. I Don’t Hate The Debate either. As an immigrant to what I genuinely felt was the last bastion of free-market of capitalism in the world, I just find being held hostage to an un-elected central planner who is obfuscating the truth un-American.


My immediate-term support and resistance ranges for Gold, Oil (Brent), Utilities (XLU), US Dollar Index, and the SP500 are now $1, $122.21-126.02, $34.74-35.68, $78.09-79.06, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Don't Hate The Debate - Chart of the Day


Don't Hate The Debate - Virtual Portfolio


The Macau Metro Monitor, March 1, 2012




"We believe we have the necessary package of agreements with the government which we need to provide assurance of success. We're just finalizing the last components of [Europa Vegas, the €17bn (£14.3bn) project ]," said LVS CEO Adelson.   Last week Adelson was in Spain again, looking at a vast beachfront stretch of land close to Barcelona's airport that has been offered to him despite environmental protection orders.


Both Madrid and Barcelona hope Europa Vegas will have the same success that Adelson has had in Singapore and Macau.  But opposition politicians in both cities are worried. "We don't agree with this sort of economic model, which would create a tax haven that comes close to being a form of slavery," said a socialist Madrid regional deputy José Quintana.  Local bishops in Madrid are rebelling against the project. "As a recent parliamentary session pointed out, gambling addiction brings with it an increase in illegal acts, suicides and bankruptcies," the bishopric of Alcalá said in a note to parishioners.



Februrary GGR came in at MOP 24.286BN (HK23.58 BN, USD3.04 BN), up 22.3% YoY.



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TODAY’S S&P 500 SET-UP – March 1, 2012

As we look at today’s set up for the S&P 500, the range is 9 points or -0.20% downside to 1363 and 0.46% upside to 1372. 












  • ADVANCE/DECLINE LINE: -949 (-985) 
  • VOLUME: NYSE 1111.24 (47.25%)
  • VIX:  18.43 2.62% YTD PERFORMANCE: -21.24%
  • SPX PUT/CALL RATIO: 2.48 from 1.33 (86.47%)



USD – get the big moves in the Dollar right, and you’ll get a lot of big things beta right. We moved to 27 for 28 in our all-time long/short USD calls yesterday (tire pump), and if you didn’t know that Gold, Basic Material Stocks, etc have correlation risk to the big up/down days in USD, now you know. We sold USD into the close as it remains below $79.06 TREND line resist.

  • TED SPREAD: 40.80
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 1.93 from 1.94
  • YIELD CURVE: 1.72 from 1.68

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, Jan., est. 0.4% (prior 0.5%)
  • 8:30am: Personal Spending, Jan., est. 0.4% (prior 0.0%)
  • 8:30am: Jobless Claims, wk of Feb. 25, est. 355k, (prior 351k)
  • 9:45am: Bloomberg Consumer Comfort, wk of Feb. 26, (prior -38.4)
  • 10am: Construction Spending, Jan., est 1.0% (prior 1.5%)
  • 10am: ISM Manufacturing, Feb., est. 54.5 (prior 54.1)
  • 10am: 30-yr mortgage rates from Freddie Mac
  • 10:30am: EIA natural gas storage change
  • 12:30pm: Fed’s Lockhart speaks on economy and banking in Atlanta
  • 11:30pm: Fed’s Williams speaks at economic forecast dinner in Honolulu


  • President Barack Obama speaks on economy in Nashua, N.H.; visits NYC for fund-raiser
  • CFTC hosts Day 2 of discussion on protecting customer funds
  • House, Senate in session:
    • Senate Appropriations Committee hears from Housing Secretary Shaun Donovan on his agency’s budget request, 9:30am
    • House Science, Space and Technology hears from Energy Secretary Steven Chu on R&D budget request, 9:30am
    • Senate Banking Committee receives the semiannual monetary policy report from Fed Chairman Ben Bernanke, 10am


  • Feb. retail sales may gain 3.5%, Retail Metrics says, helped by warmer-than-avg. weather, Presidents, Valentine’s Day holidays
  • Light-vehicle sales in Feb. may have run at 14.2m SAAR, matching Jan.; watch to see how gas prices impact mix
  • Fed Chairman Bernanke heads before Senate for second day of testimony; no signal yesterday that economy needs addl monetary boost
  • Yelp IPO expected to price after the market closes; seeking to raise as much as $100m
  • ISDA Determinations Committee to examine whether credit event happened with Greece, affecting credit-default swaps
  • ISM factory index may have climbed to 8-mo. high of 54.5 from 54.1 in Jan.,economists est.
  • U.S. homes in or nearing foreclosure accounted for 24% of residential purchases in 4Q, up from 20% in 3Q: RealtyTrac
  • Shell filed an injunction seeking timely review of Alaska exploration plans
  • China’s manufacturing index rose to 51.0, third straight month of gains
  • Bank of America considering new checking-account fees: WSJ
  • Tata Communications considering a bid for Cable & Wireless; Vodafone also evaluating offer for network operator
  • European inflation accelerated in Feb. to 2.7% from 2.6% in Jan. as oil prices rose


    • Bombardier (BBD/B CN) 6am, $0.12
    • Royal Bank of Canada (RY CN) 6am, $1.14
    • Toronto-Dominion Bank (TD CN) 6:30am, $1.77
    • Martha Stewart (MSO) 7:30am, $0.06
    • Kosmos Energy (KOS) 8am, $0.11
    • George Weston (WN CN) 8am, $0.98
    • Kroger (KR) 8:45am, $0.49
    • Esterline Technologies (ESL) 4pm, $0.75
    • Ascena Retail Group (ASNA) 4:02pm, $0.67
    • National Bank of Canada (NA CN) 4:30pm, $1.82
    • Foot Locker (FL) 4:45pm, $0.51



GOLD got gold? Into its 12th straight up year, plenty of people do - so do we. The line in the sand that matters to us is $1691 – that’s our TREND line – below it, we're a seller – above it we buy. Its pure momentum driven by the Bubble in Keynesian Economics so we'll just call that out for what it is. The risk for Gold is Bernanke losing his job, so watch Romney’s momentum.

  • Iron Ore Extends Bull Market as Supply Growth Drops: Commodities
  • Saudi Oil-Rig Use Soars as Obama Pressed on SPR: Energy Markets
  • Brent Oil Rises a Second Day as Iran Risk Counters Supply Gain
  • Gold Rebounds Above $1,700 After Bernanke’s Comments Spark Rout
  • Commodities Give Best Returns First Time Since July on Iran Risk
  • Copper Advances as Manufacturing Growth Strengthens in China
  • Wheat Falls as Storms in U.S. May Moisten Soil; Soybeans Drop
  • Robusta Coffee Increases on Supply Concerns; Cocoa Advances
  • Gold Offering No Lifeboat for Iran Oil Sales: Chart of the Day
  • Impala Continues Rehiring Workers as Protesters Block Routes
  • Japan Says in Talks to Start Importing LNG From Continental U.S.
  • Keystone Oil Pipeline Seen Raising Gas Prices in Midwest: Energy
  • Iran Suffers ‘Crippling Effect’ of Sanctions on Trade, Banking
  • Thai Rice Stocks to Surge as Yingluck Extends Purchase Program
  • U.S. Was Net Oil-Product Exporter in 2011
  • Cheap U.S. Corn May Spark China Import Binge: Chart of the Day
  • Silver May Climb to Record on Haven, Industry: Chart of the Day















INDIA – out with the Keynesian textbooks - we define economic stagflation like yield curves do – when inflation is running higher than nominal growth. India has it right now. Sensex down another -1.1% overnight, snapping its TRADE line of 17,683 (that’s new). Countries that are net short oil are in for more pain like they incurred in Q211. Brent hold my $122.21 support.










The Hedgeye Macro Team



Grains were up over the last week while beef declined.  The trend in beef prices is still positive, however, as grocery store beef prices re-set record highs and global demand for U.S. beef remains strong.  Here is a table showing the trends for the commodity monitors we track.    At the end of the post, we supply stacked line charts of each of the commodities below for the last few years of data. 







Gas prices continue to rise, the question is at what point it really starts to impair consumption if it has not already.  Last Friday in NYC, Darden CEO Clarence Otis said, “I would say as we look back, we don't think the current levels, $4 current gas prices, no longer represents sticker shock. And so as we think about this improving trend that the industry has been on over the last two years that trend has been despite the fact that we've seen these levels before. And so, I think people especially at the income demos that we're talking about $4 … we don't see huge effect.  We didn't see it the last time, which I think was roughly 12 months ago if I am not mistaken.”


WEEKLY COMMODITY CHARTBOOK - retail gasoline prices





Grains: Wheat and corn prices gained over the past week as shortfalls elsewhere in the world have led to investors buying U.S. grains


Corn:  U.S. corn futures are trading strongly on growing export demand… Many dynamics are currently being factored into corn prices including gas prices, gasoline consumption, and ethanol margins, the U.S. Dollar, and demand from China…  The USDA’s projections indicate that U.S. corn prices at the farm level are expected to average $5 a bushel for the ‘12/13 marketing year…  The USDA’s calculations suggest that a combination of higher yields and higher acreage will generate an almost 2 billion bushel increase in US corn production come fall.


Wheat:  Supplies are at record levels… prices are down -15.1% year-over-year despite gaining 3% this past week as concerns mounted around reduced acreage in Ukraine and freeze damage to wheat in Eastern Europe, Ukraine, and Southern Russia. 


Beef: Global demand for beef remained strong in the first two months of the year, continuing to track above year-ago levels… Weather is improving prospects for farming in areas of Texas but some areas, like the Panhandle, are still suffering from adverse weather… Experts expect it will take a year for pastures to recover, however… the US cattle slaughter rate has declined below 600k per week in three of the last four weeks as fewer cows enter market… Slowing cattle placements in January slowed, confirming a continuing tightening of beef supplies


Chicken: Egg sets placements continue to contract at around the same rate, according to the Broiler Hatchery report released by the USDA today.


WEEKLY COMMODITY CHARTBOOK - egg sets vs wing prices




Beef: Most companies are expecting beef cost inflation to be up mid-to-high single digits versus last year


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.


DRI:  U.S. beef production will continue decline though over the next 24 months, placing continued upward pressure on beef prices because of the slow economic recovery hamburger and value oriented beef, cattle beef are in high demand and can be priced accordingly by the packers. At Darden we purchased mainly tenderloins and other premium steakcuts, while we expect pricing for our beef products to increase by 12% our pricing has been tempered by consumers' resistance to record higher retail prices for premium stakes and the resulting shift to value oriented cuts and as you can see beef is approximately 14% of our cost basket … We have 75% of our beef requirements contracted for fiscal 2012 and 40% of the June to December usage under contract for fiscal 2013.


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.



Coffee: Prices are now down -24% versus last year


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.



Dairy: CAKE, DPZ, PZZA, TXRH and others could benefit from favorable cheese costs this year


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.





























Chicken – Whole Breast


WEEKLY COMMODITY CHARTBOOK - chicken whole breast



Chicken Wings















Howard Penney

Managing Director


Rory Green


Volcker Rule comments: The good, the bad, and the ridiculous

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