Politics and Prejudice

This note was originally published at 8am on February 23, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 $1736-1782, $119.45-123.86, $79.01-79.47, and 1353-1363, 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


TODAY’S S&P 500 SET-UP – March 8, 2012

As we look at today’s set up for the S&P 500, the range is 18 points or -0.56% downside to 1345 and 0.77% upside to 1363. 















With Bernanke’s Policy To Inflate back into the whispers of sweet nothing volume rallies again, we are still tasked with risk managing the immediate-term ranges of being long Inflation until the Growth music stops. Fun.

  • ADVANCE/DECLINE LINE: 1724 (4233) 
  • VOLUME: NYSE 800.91 (-8.76%)
  • VIX:  19.07 -8.62% YTD PERFORMANCE: -18.50%
  • SPX PUT/CALL RATIO: 1.74 from 1.63 (6.75%)


  • TED SPREAD: 40.33
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 1.99 from 1.98
  • YIELD CURVE: 1.70 from 1.67 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Bank of England rate decision, est. 0.5%
  • 7:30am: Challenger Job Cuts (Y/y), Feb.
  • 7:45am: ECB rate decision, est. 1.0%
  • 8am: RBC Consumer Outlook Index
  • 8:30am: Jobless Claims, week of Mar. 3, est. 351k (prior 351k)
  • 9:45am: Bloomberg Consumer Comfort, week Mar. 4, est. -39.0
  • 10am: Freddie Mac 30-yr mortgage
  • 10:30am: EIA Natural Gas 


  • President Obama meets with Ghanaian President John Atta Mills
  • Treasury Secretary Tim Geithner will tour BNSF facility in, Texas, discuss economy at event hosted by Dallas Regional Chamber, 4pm
  • House, Senate in session
    • House Appropriations subcommittee hears from Transportation Secretary Ray LaHood on budget request, 9:30am
    • House Energy and Commerce panel holds hearing on FDA user fees, accelerated approval of treatments, with testimony from Alnylam Pharmaceuticals CEO John Maraganore, 10am
    • House Budget Committee meets on FY2013 budget, 10am
    • Senate Appropriations subcommittee hears from Attorney General Eric Holder on Justice Department’s budget request, 10am
    • House Energy and Commerce subcommittee hears from Energy Secretary Steven Chu on budget, 10am
    • Senate Appropriations subcommittee hears from acting Federal Housing Administration head Carol Galante, 10am
    • Senate Appropriations subcommittee hears from Homeland Security Secretary Janet Napolitano on budget request, 10am
    • Senate Homeland Security Committee hears from Homeland Security Secretary Janet Napolitano on budget request, 2:30pm 


  • ECB may lift its 2012 inflation forecast above the 2% price- stability threshold today, economists est.; interest rate seen to remain at 1%
  • AIG shares said to be offered at $29 each as Treasury reduces stake
  • AT&T in talks to sell a majority stake in its Yellow Pages unit to Cerberus
  • Investors with ~60% of the Greek bonds eligible for debt swap have so far indicated they’ll participate, putting it on verge of biggest sovereign restructuring in history
  • U.S. said to warn Apple, publishers over e-book pricing: WSJ
  • FDA staff issues report of new class of pain medicines that target nerve growth factor
  • Facebook gets $8b credit line while adding to banker list
  • Toyota revamps North American management to boost regional unity
  • McDonald’s to release monthly sales at 7:58am; Texas Instruments to provide mid-quarter update post-market
  • Rick Santorum-backers pressuring Newt Gingrich to drop out of Republican presidential contest
  • Italian-German 10-yr yield spread falls to least since Sept. 1 


    • Smithfield Foods (SFD) 6 a.m., $0.65
    • Canadian Imperial Bank of Commerce (CM CN) 6 a.m., $1.93
    • Williams-Sonoma (WSM) 6:30 a.m., $1.13
    • Navistar (NAV) 7 a.m., $(0.27)
    • Buckle (BKE) 7 a.m., $1.15
    • Viterra (VT CN) 7 a.m., $0.21
    • AltaGas Ltd (ALA CN) 7:24 a.m., $0.30
    • Cominar Real Estate Investment Trust (CUFu CN) 8 a.m., $0.43
    • John Wiley & Sons (JW/A) 8 a.m., $0.94
    • JinkoSolar (JKS), Pre-mkt, ($1.88)
    • Cooper (COO) 4:01 p.m., $1.04
    • Ulta Salon Cosmetics & Fragrance (ULTA) 4:01 p.m., $0.67
    • Aeropostale (ARO) 4:01 p.m., $0.38
    • Renren (RENN) 5 p.m., $-
    • Approach Resources (AREX) Post-Mkt, $0.22 


  • Drought Tightens Corn Supply Before Record Harvest: Commodities
  • World Food Prices Climb for a Second Month on Grains, Oils
  • Oil Rises a Second Day on Signs Sanctions Cutting Iran Exports
  • Copper Climbs Most in a Week on Signs of U.S. Rebound, Stocks
  • Gold Climbs as Decline in Dollar’s Value May Signal More Demand
  • Soybeans Gain on Speculation USDA to Cut Brazil Crop Estimate
  • BofA Says U.K. LNG Imports May Halt If Japan Reactors Stay Shut
  • Palm-Oil Stockpiles in Malaysia Set to Reach Six-Month Low
  • Sugar Imports by Bangladesh More Than Double on Crop, Price
  • BHP Stirs Memory of Alcan Writedowns as Shale Gas Sours: Energy
  • Asia Gasoil Crack Falls; Hin Leong Buys Fuel Cargo: Oil Products
  • Global Insurers Targeted in Proposed U.S. Sanctions Against Iran
  • China Said to Stop New Crushing Plants Using Imported Rapeseed
  • Oil Rallies More From Dollar Outlook Than Iran: Chart of the Day
  • China Wants India’s Cotton Ban Lifted as Ministers Review Curb
  • Sugar Falls as Producers Sell After Price Rises; Coffee Rose
  • U.S. Spring May Be Warmer Than Normal, AccuWeather Forecasts 






















The Hedgeye Macro Team


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 80.46%
  • SHORT SIGNALS 78.35%

An Easier Solution

“At the end of this decade, in the year 1980, the United States will not be dependent on any other country for the energy we need to provide our jobs, to heat our homes, and to keep our transportation moving.”

- Richard Nixon, 1973


The current obsession in the US with energy independence is not a new one.  Richard Nixon, quoted above, embarked on “Project Independence” after the 1973 OPEC embargo led to a world oil crisis; nearly every president since has set a similar goal – none have come close to reaching it.  In 1973 the US imported 34% of its consumed petroleum; today, we import 45%.


In a speech yesterday, President Obama summarized his broad energy plan, “If we are going to control our energy future, then we’ve got to have an all-of-the-above strategy.  We’ve got to develop every source of American energy -- not just oil and gas, but wind power and solar power, nuclear power, biofuels.”


That sounds like a pretty good idea, particularly as prices at the pump have ripped to an all-time high for March, $3.76 per gallon.  As a direct result, gasoline consumption has fallen to the lowest level in over a decade, and is running 6.5% below last year’s level.


While energy independence is not an original idea, is it more realistic this time around?


It’s key to understand that the US does not have an energy crisis – it has a liquids fuel shortage.  71% of the petroleum consumed in the US is by the transportation sector; only 1% is used to generate electric power.  The US is actually abundant in its two largest power-generating sources, coal and natural gas, with the 1st and 6th largest recoverable reserves in the world, respectively.


Currently, solar and wind can only be used to generate electricity, so it is difficult to see how developing these renewable sources will lower gasoline prices or make us any more energy independent.  Further, because of issues with intermittency (the sun shines during the day, the wind blows at night, and the energy cannot be stored), low electricity conversion rates, large space requirements, and higher-than-expected operating and maintenance costs, solar and wind are simply not economic.  Even with government subsidies and private investment, the EIA estimates that solar will generate less than 1% of US electricity in 2035.  Solyndra…?  First Solar…?


Nuclear power, like solar and wind, can do very little to solve our liquids fuel shortage, as 100% of nuclear energy generated in the US is for electricity.  Regardless, there has been almost no new nuclear construction in the US in the last 30 years because of rising capital costs and risks, particularly after the nuclear disasters of the 80’s.  It is puzzling why President Obama is intent on revitalizing nuclear in the US only months after Japan’s Fukushima disaster.  And nuclear power is hardly a domestic resource – the US imports more than 80% of its required uranium.


Ethanol and biodiesel supplied 0.5% of the world’s primary energy in 2010; but increasing biofuel production comes at the cost of the world’s food and water supply.  If the US were to use its entire corn harvest to produce ethanol, it would only replace 8% of the country’s annual gasoline demand.  Cellulosic ethanol (ethanol produced from agricultural waste) has less of an impact on the world’s food, water, and fertilizer sources, though is challenged by extraction and aggregation costs as well as low energy density.


This is not a smear campaign against alternative and renewable energy sources.  With investment and time, technologies that are not currently economic, viable, or scalable one day will be, lessening our need for petroleum fuels.  The US should invest more (wisely) in energy R&D, starting with natural gas vehicles and the necessary refueling infrastructure.


But energy transitions take time.  Not years – decades, perhaps even generations.  Natural gas took 60 years from the time it was first commercially extracted (1870s) before it was 5% of the world’s primary energy market.


President Obama stated earlier this week that, “Folks are getting killed right now with gas prices.”  Touting alternative energy does nothing to fix that; neither does blaming rising oil prices on tensions in Iran, growth in China, and those pesky Wall Street speculators.  The only legitimate way to lower gasoline prices in the immediate term is the one that most of our leaders never consider: raising interest rates.


Near-zero interest rates and massive liquidity injections from the developed world’s central banks have driven investors into real assets, like oil and gold, in an effort to preserve purchasing power.  Net length among non-commercial traders in NYMEX crude oil futures and options is 333,000 contracts, nearly double the July 2008 high of 170,000 contracts when oil spiked to $145 per barrel.  In 1991, there were 3.3 dollars of money supply to every 1 barrel of oil; today there are 7.1 dollars chasing that 1 barrel.  And while the price of gasoline in dollars has increased 95% since March 2009, gasoline priced in an ounce of gold is only +7% over the same period.


Many factors influence the price of oil – supply, demand, geopolitical risk – but monetary policy is really the only one within the US’s control, and that policy cannot be any more inflationary for the price of petrol.  Recognition of such would be a refreshing dose of accountability; it would also give consumers a much-needed break at the pump.


Our immediate-term support and resistance ranges for Gold, Brent Oil, WTIC Oil, Natural Gas, US Dollar Index, and the SP500 are now $1, $123.31-126.81, $106.13-109.22, $2.21-2.39, $79.36-80.21, and 1, respectively.


Kevin Kaiser



An Easier Solution - EL chart


An Easier Solution - vp 3 8


The Macau Metro Monitor, March 8, 2012




Macau lawmaker Ng Kuok Cheong criticized the casinos and resorts for intentionally suppressing salaries to drive away local workers and employ foreign labour.  He said some local job seekers attending casinos and resorts’ recruitment fairs told him that they felt the employers were intentionally offering lower salaries than market price so that local workers would lose interest in those jobs and the companies can use up their maximum quota of imported labor. 


US Dollar strength over the past week pressured commodity prices across the board with only chicken breast prices, of the commodities we monitor, posting a significant gain.  Coffee prices continue to lead the way to the downside. 







Gas prices continue to move higher, gaining 50 bps over the last week despite Brent Crude prices declining -0.3% over the same period.  Below are some recent comments from management teams regarding the impact of gas prices on their businesses.  Clearly, given a sufficiently substantial rate of increase in gasoline prices, we will see an impact on restaurant companies’ top line trends.


WEN: Obviously, we're all watching gas prices carefully and – but consumers seem to quite honestly have digested that quite nicely.


BAGL: If employment continues to be positive, again from my perspective, I think that sort of offsets any impact that you might get – we might get on gas prices … That said, if employment tightens up or we don't see continuously positive momentum than longer-term, obviously, if we get a $5 gas price, that's one of those price points that hits overall.


CBRL: We think that given our susceptibility particularly to – in the summer travel season to potential increases in gasoline prices that it is appropriate to be suitably cautious about our third and fourth quarter traffic outlook.


DRI: Yes, I would say as we look back, we don't think the current levels, the $4 current gas prices, no longer represents sticker shock.











The USDA expects China’s corn production to drop 190 million metric tons in the year starting October 1st, down from 191.75 million metric tons the year prior.  China’s corn imports are expected to remain steady at 4MMT.




Corn prices fell 2% today as commodity funds liquidated long positions ahead of the USDA crop production release at 8:30AM on Friday.


Speaking at the Bayer CropScience Ag Issues Forum in Nashville, Tennessee recently, William Lapp, grain economist with Advanced Economic Solutions stated that three factors have driven commodity prices to record levels: strong global economic growth in agriculture led by developing economies such as China, a weakening of the US dollar since 2002, and biofuels policy for grain use in the US.  He believes that the “corn ethanol story is nearing the end” as the science lower cost cellulosic ethanol production progresses.







Concerns about a “glut” of wheat supplies overwhelming demand.  Crops in key growing regions have seen favorable growing conditions





Wheat prices fell 3% today as commodity funds liquidated long positions ahead of the USDA crop production release at 8:30AM on Friday.







China’s rate cut in its forecasted economic growth rate on Monday has heightened concerns around the outlook for the world’s biggest buyer of soybean.







The US herd remains depleted and the first steps for producers to develop a plan of action are to see how conditions are in the spring, forage growth following last year’s damaging drought, and financial and economic factors. 





A fascinating article on discusses the bright future of China’s beef market.  According to consulting company Frost & Sullivan, China’s beef market is still in the primary development stage but it is likely to get more opportunities to grow with support from governmental policies.







Joe Sanderson, CEO of Sanderson Farms, said today that there is no chance of the supply of chicken growing this year.


Egg sets placements continue to contract at around the same rate, -5.4%, according to the Broiler Hatchery report released by the USDA today. This implies that supply will remain tight as the industry looks for more favorable business conditions before expanding production.


WEEKLY COMMODITY CHARTBOOK - egg sets 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 -32% 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







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